August 4, 2014 9:48 am
Investors blow froth off junk bond market
“The first thing you learn on the trading floor is that when large numbers of people are after the same commodity, be it a stock, a bond, or a job, the commodity quickly becomes overvalued.”
So wrote Michael Lewis in Liar’s Poker, his account of life as a bond salesman during the boom years of 1980s Wall Street.
For the past five years few asset classes have been chased as much and by so many as the junk bonds issued by low-rated companies.
Lured by the higher returns on offer from investing in the risky debt, investors have poured $80.7bn into US “high-yield” bond funds since the Federal Reserve began its emergency economic policies in 2009 – not far from the $126.3bn that went into global stocks in the same period.
The push into junk bonds has sparked concerns that valuations are stretched and that the inevitable exit from what has been a historic bull run is likely to be messy.
In fact, the name “high-yield” is beginning to look outdated when it comes to the returns currently on offer from investing in the debt. Low interest rates have herded investors into junk bonds, pushing yields on the securities ever lower and creating a feedback loop as companies take advantage of cheaper refinancing costs to issue more debt.
Average yields on junk bonds touched a record low of 4.82 per cent in June, according to Barclays data – a far cry from the 22.9 per cent seen in 2008. At the same time, sales of the debt totalled $210.8bn in the first seven months of the year – the highest period of issuance since at least 2000, according to Dealogic.
Potentially frothy credit markets have not gone unnoticed by regulators. Earlier this month Janet Yellen, Fed chairwoman, warned that valuations in the high-yield market “appear stretched” – alarming investors and triggering a flight from the sector that resulted in its worst monthly performance in more than a year.
Now investors must figure out whether this is a blip or the first sign of a turn in the corporate credit cycle. Some are particularly fearful that a reversal in the junk bond market could be more severe than in previous downturns.
While sales of the debt have jumped, investors’ ability to trade the bonds in the secondary market is said to have dropped sharply. Banks, under pressure from new regulation, have pared the amount of risky bonds held on their balance sheets, meaning there may be less of a cushion to absorb sales of the debt during a market rout.
Whatever the reason, most market participants agree that liquidity available in corporate bonds has declined markedly – yet the dramatic change has so far been masked by strong sales of the debt in primary markets and hefty investor demand.
“We should be mindful of significant primary market volumes compared to lacklustre secondary markets,” says Jim Esposito, co-head of the global financing group at Goldman Sachs. “Recently, investors have not required large amounts of secondary market liquidity but at some point they will.”
Compounding matters is the fact that more than a third of US corporate bonds are now owned by “mom and pop” investors who have piled into fixed-income funds and exchange traded funds (ETFs) that offer instant access to the debt.
“A lot of that is in the hands of retail, which see ETFs as a resolution to liquidity problems. And they will be able to sell in a down market, but at what price?”
Despite such concerns, many fund managers say it may be too soon to fear a sell-off. Corporate default rates remain low and the Fed has said it is committed to keeping rates near zero until at least mid-2015.
In addition, a healthier US economy and buoyant stock market has traditionally been beneficial for junk-rated companies.
“High-yield bonds tend to do well in a stronger-economy, rising stock market environment,” says Sabur Moini, high-yield fund manager at Payden & Rygel.
“It may even be healthy for the market if we see a ‘mini correction’, with spreads widening another 20 to 30 basis points. For people like us, that would provide a good buying opportunity.”
Mr Collins at Prudential says investors should avoid the “temptations” that are so often found during memorable market booms.
“It is important not to be too greedy, and not sacrifice too much credit quality in order to capture a bit more yield. You don’t want to be the guy picking up pennies in front of a steam roller.”
With additional reporting by Nicole Bullock
Copyright The Financial Times Limited 2014.
0 comments:
Publicar un comentario