June 13, 2013 at 01:16 AM EDT
Junk Bonds Remain Attractive Despite Fed Policy Risk
From Standard & Poor’s Ratings Services The combination of lower returns on investment for investors and higher borrowing costs for nonfinancial issuers has not curbed investor demand for speculative debt. In fact, just the opposite has occurred: the count of speculative-grade new issuance reached a 12-month high in May, according to a [...] Sign Up for Daily Updates for Premium Research News           Related Stories Moody’s Senior Unsecured Bond Rating – Risk-to-Price Commentary Recovery Expected to Continue at a Slow Pace for U.S. States Despite Ongoing Uncertainty Recession Concern Dampens European Bond Investor Sentiment, Though Hunger For High-Yield Continues  

From Standard & Poor’s Ratings Services

The combination of lower returns on investment for investors and higher borrowing costs for nonfinancial issuers has not curbed investor demand for speculative debt. In fact, just the opposite has occurred: the count of speculative-grade new issuance reached a 12-month high in May, according to a new report from Standard & Poor’s. 

U.S. Treasury and industrial bond yields have been ticking upward since the beginning of May, even though they are still at “ultra-low” levels historically.

“This movement roughly coincides with the Federal Reserve’s (Fed’s) recent announcement of its intent to wind down its policy of buying $85 billion in monthly mortgage debt,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research. “Not surprisingly, industrial bond returns have been seeing a downward trend of noteworthy levels over the same time.”

U.S. speculative-grade industrial bond yields have been falling at a consistent pace during the last 10 months, reaching record lows as investors seek returns after the U.S. Treasury yields hit an all-time low on July 25, 2012. This trend held up until roughly May 6, when both the five-year Treasury yield and the five-year speculative-grade industrial bond yield began to rise markedly.

Over the course of May, the yield on the five-year Treasuries rose 40 basis points (bps) to 1.05% as of May 31. Meanwhile, the yield on speculative-grade nonfinancial bonds rated ‘BB+’ widened by 67 bps, and the yield on those rated ‘BB/BB-’ and ‘B-’ rose 41 bps and 46 bps, respectively. “However, the increase in Treasury yields is more substantial in a relative sense, and it has resulted in a decrease in the spreads on five-year speculative-grade bonds,” said Ms. Vazza. “As a result, speculative-grade industrial debt has remained all the more attractive to investors, despite speculation about when this run in profitability will end.”

For details see The Federal Reserve’s Recent Statement Prompts A Change Of Course For Debt Markets, which examines whether the boom will bust when the Fed’s bond buying program ends.

Technorati Tags: Federal-Reserve, junk-bonds, speculative-grade-bonds

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