| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Junk-Bond Bears, Bulls Swap Sides After Market Rally: |
By Caroline Salas, Bloomberg
Dec. 5 (Bloomberg) -- JPMorgan Chase & Co. and Morgan Stanley missed the biggest rally in junk bonds since 2003. Now they say it's time to buy.
UBS AG, which recommended debt with ratings below investment grade, is telling clients that the best may be over after the securities returned 10.8 percent this year, four times more than in 2005.
No matter who is correct, analysts at the biggest U.S. securities firms agree that defaults will stay near record lows because profits at American companies haven't been this big a part of the economy since 1950. After selling a record $163 billion of high-yield, high-risk bonds this year, the neediest borrowers may have no trouble raising money in 2007.
``I am fairly bullish for the next few years,'' says Michael Collins, who oversees $13 billion in high-yield debt for Prudential Investment Management in Newark, New Jersey. ``Fundamentals on average continue to be very strong.''
Prudential funds that can buy all kinds of bonds allocated about 15 percent to securities with below-investment-grade ratings, up from less than 10 percent three months ago, Collins said in an interview last week. Prudential manages $188 billion in fixed-income assets.
Debt rated below BBB- by Standard & Poor's and Baa3 by Moody's Investors Service is considered non-investment grade. Junk bonds outstanding have doubled to $900 billion since 1998, according to data compiled by New York-based Merrill Lynch & Co.
`Overly Bearish'
Morgan Stanley's Brian Arsenault, who said high-yield bonds would return 2 percent, and JPMorgan's Peter Acciavatti, who expected 3 percent, now urge investors to buy. Money managers should own the same percentage of junk bonds as is contained in benchmark indexes, Arsenault said in an interview last week. JPMorgan today forecast returns of 8 percent in 2007.
UBS's Stephen Antczak, who predicted 8 percent returns, says investors should prepare to cut their holdings next year. Moody's Chief Economist John Lonski, who also recommended junk bonds last year, now says returns will shrink to 4 percent.
``We have been a little surprised by how strong the market has stayed,'' said Eric Johnson, president of Carmel, Indiana- based 40/86 Advisors Inc., which manages $26 billion in fixed- income. ``We expected it to weaken coming into the second half of the year,'' said Johnson, who also forecasts returns of about 8 percent.
Corporate Profits
Gains in 2007 would mark five years of positive returns, matching the longest rally since at least 1986, according to Merrill Lynch. Demand is so high that Akron, Ohio-based Goodyear Tire & Rubber Co., America's largest tire maker, was able to sell $1 billion of bonds last month, six weeks after 15,000 United Steelworkers of America workers walked off the job. The company is rated B2 by Moody's.
Corporate profits accounted for 12.4 percent of the U.S. economy last quarter, the highest in 56 years, the Commerce Department said last week. Only 1.8 percent of all junk bonds defaulted in the past 12 months, down from 2.6 percent for 2005, according to JPMorgan in New York.
``It all starts with a good credit backdrop,'' said JPMorgan's Acciavatti, Institutional Investor magazine's top- rated junk-bond analyst. ``Low defaults help to increase investors' willingness to take risks. High-yield performance in 2007 will be similar to this year.''
Acciavatti predicts the default rate may rise to between 2 percent and 2.5 percent next year, below the average of 4.3 percent over the past 25 years, measured by dollar volume.
``For people that are constructive on the U.S. economy, it has a bit of a domino effect, and those people are more bullish on high-yield,'' he said. ``I would be in that camp.''
Low Premiums
Investors demand 3.20 percentage points more in yield to own junk bonds instead of Treasuries, down from 3.65 percentage points at the end of last year, Merrill Lynch index data show. The spread has averaged about 5.50 percentage points during the last 10 years. Merrill Lynch and JPMorgan analysts forecast the gap would widen by about half a percentage point this year.
``You're really hard-pressed to find pockets that are highly susceptible to significant credit deterioration or weakness,'' Prudential's Collins said.
Lear Corp. reported losses in five of the last six quarters. That didn't stop investors from scooping up $900 million of seven- and 10-year notes the company sold on Nov. 20 to buy back bonds that mature in 2008 and 2009. The Southfield, Michigan- based maker of automotive seats increased the size of the sale from $700 million.
Best Performers
The riskiest junk bonds, those rated CCC and lower, have performed best this year. Bonds from companies including Charter Communications Inc., Tembec Inc., Level 3 Communications Inc. and Trump Entertainment Resorts Inc. have returned 16.5 percent on average in 2006, Merrill Lynch data show.
Junk-bond sales total about $163 billion this year, topping the previous record of $161 billion in 2004, according to data compiled by Bloomberg.
Some former bulls say the outlook for earnings hurts prospects for high-yield bonds. Profit growth for members of the S&P 500 Index may slow to 6.5 percent by the second quarter of next year, from 19 percent in the three months ended Sept. 30, according to Thomson Financial on Nov. 24.
``Everybody is pricing in a perfect soft landing and nobody is considering something negative will happen,'' UBS's Antczak said in an interview from his office in Stamford, Connecticut. ``The No. 1 risk is a pick-up in the default rate, no matter how it occurs, through the slowing economy or deals that are too heavily levered.''
September Advice
Antczak in December 2005 forecast that junk bonds would earn as much as 8 percent this year. In September, when returns reached 6.5 percent, he said ``it might be a decent time to take some profits.''
Lonski at Moody's in New York, who also called for 8 percent returns in 2006, said last month in an interview that yield spreads will widen by as much as 70 basis points as the economy slows. A basis point is 0.01 percentage point.
``It's the classic grab for yield that's going on right now and historically that has never ended very pretty,'' said Scott Schroepfer, who manages $3 billion of high-yield debt at Minneapolis-based RiverSource Investments LLC.
Junk bonds yield 7.92 percent on average, according to Merrill Lynch index data. That's just below the 8.18 percent rate for B-rated loans, which rank ahead of bonds in a bankruptcy. The bonds yielded an average 10.3 percent over the past decade.
RiverSource is investing more funds in bonds of companies that weather economic slowdowns, such as hospital operators. High-yield spreads should be about half a percentage point wider, Schroepfer said.
Morgan Stanley in December 2005 recommended investors ``underweight'' high-yield debt because companies would have a harder time making their debt payments. The firm increased its weighting to ``equal-weight'' in October.
Earnings Momentum
``I didn't think earnings momentum would hold up quite as well as it did,'' Arsenault said in an interview from his New York office. ``There's a huge investor universe buying purely based on their view of defaults.''
The bulls say supply won't overwhelm demand. Two of the three biggest junk bond sales ever took place last month: Nashville, Tennessee-based hospital operator HCA Inc. sold $5.7 billion of debt on Nov. 9 to finance its takeover and Freescale Semiconductor Inc. in Austin, Texas, sold $5.95 billion of bonds on Nov. 16 to fund its leveraged buyout. Both cut interest payments by as much as 63 basis points from proposed levels because of investor demand.
``If anything, you can characterize the current environment as a bit of a shortage of new corporate debt,'' said Christopher Garman, high-yield strategist at Merrill Lynch in New York.
Best Performers
The best-performing industries this year were 2005's worst: autos and airlines. Junk-rated bonds of automakers and auto-parts suppliers earned 22.4 percent for investors this year, compared with a 10.6 percent loss in all of 2005 as General Motors Corp. and Ford Motor Co. were downgraded to speculative-grade status and auto-suppliers including Delphi Corp. filed for bankruptcy.
High-yield airline bonds have also recovered from their 10.2 percent loss in 2005, spurred by Delta Airlines Inc. and Northwest Airlines Corp.'s bankruptcy filings. The debt has returned 21.4 percent in 2006, Merrill Lynch data show.
``There is sort of a virtuous circle at work with spreads forced tighter,'' said Johnson at 40/86 Advisors.
To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net
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