August saw $23.0 billion in high-yield bond issuance, according to data provider Dealogic, the 7th-largest monthly volume on record. The performance was remarkable because August has historically been a relatively quiet month, and because no junk bonds priced during August's final 10 days.
After holding firm in July and early August, corporate bonds faded late in the month, losing some value in thin secondary market trade. A market respite is normal during peak late-summer vacation season, but this one also coincided with the worst August for equity markets since 2001.
Junk bonds, which often move in tandem with stocks, now are tasked with regaining their momentum in September—historically the worst month of the year for equities—and October, the second worst.
Despite how far junk bonds have come—returning +57% in 2009 and +8.3% in 2010 to date, according to Merrill Lynch—investors still see the potential for further gains.
"Considering the continued improvement in corporate balance sheets and how much demand there's been for high yield, there's still a lot of value in the high yield market," said Gibson Smith, fixed-income portfolio manager at Janus Capital Group.
Fund managers such as Mr. Smith cite current average high-yield risk premiums of +6.9 percentage points above Treasurys, more than a full percentage point higher than historical norms, and say that could shrink further without getting out of line with default expectations, even while underlying Treasury rates bounce along near historic lows.
The economy keeps struggling, but fixed-income market participants point out that their asset class is less reliant on growth than equities in order to produce solid returns.
"The last several weeks there's been a lot of press given to the weak economic data and slowing growth numbers, and that's led to a downturn in equities," said Jim Merli, head of debt distribution and origination at Nomura Securities. "We're of the view that we are going to see relatively modest growth at a level which will be positive for the credit markets."
"Considering the continued improvement in corporate balance sheets and how much demand there's been for high yield, there's still a lot of value in the high yield market," said Gibson Smith, fixed-income portfolio manager at Janus Capital Group.
Fund managers such as Mr. Smith cite current average high-yield risk premiums of +6.9 percentage points above Treasurys, more than a full percentage point higher than historical norms, and say that could shrink further without getting out of line with default expectations, even while underlying Treasury rates bounce along near historic lows.
The economy keeps struggling, but fixed-income market participants point out that their asset class is less reliant on growth than equities in order to produce solid returns.
"The last several weeks there's been a lot of press given to the weak economic data and slowing growth numbers, and that's led to a downturn in equities," said Jim Merli, head of debt distribution and origination at Nomura Securities. "We're of the view that we are going to see relatively modest growth at a level which will be positive for the credit markets."
John:
ReplyDeleteI miss your insight and your interesting writing you supplied for so long in Vantage Point.
Please keep me on your distribution list.Incidentally, it seems to me that Hi Yld Corp. has interpolated between the stock and bond mrkts for much of the time. As you point out it is exceeding both now.
Morningstar 500 is no substitute for Vantage Pt. Harold Black (CIT '52)