Revenge Of The Junk Bonds

Drugstore chain Rite Aid and truck and engine maker Navistar International tapped the cash flowing into high-yield bond markets this week as borrowing costs dropped and expectations for trouble fell.

The market absorbed roughly $5 billion in new speculative-grade (junk) bonds. A team of banks led by Citigroup ( C – news – people ) handled Rite Aid’s sale of $268 million in 10-year notes paying 10.25%. Credit Suisse ( CS – news – people ) ran Navistar’s $963 million issue of 12-year notes with an 8.25% coupon. Corporations have raised $94 billion through U.S. junk bond sales this year, a 183% rise over the same period last year, according to Thomson Reuters.

Hunger for risky credit keeps growing. One measure is the difference between junk bond yields and 10-year Treasurys. This spread stood at 7.52 percentage points on Oct. 22, the lowest point in the past year, Bank of America Merrill Lynch data shows.

Though stocks lay claim on the public’s attention, high-yield bond funds have proved more popular this year. Investors moved another $391 million into junk bond funds in the seven days to Oct. 21, bringing this year’s tally to $20.4 billion, according to fund tracker EPFR Global. In comparison, they’ve pulled $51.3 billion from U.S. equity funds.

A resurgent appetite for risk, along with reopened bond markets and falling borrowing rates, contributed to the rating agency Standard & Poor’s decision to chop its projected default rate in half this week. S&P expects 6.9% of junk bonds to default in the next year, instead of 13.9%. (See “The Falling Failure Rate.”)

The revision caused some confusion. S&P still expects the default rate to climb higher than the current 10.8%, said Diane Vazza, the rating agency’s head of fixed income research. But the peak rate should be lower because companies have been able to refinance debts. Many of them could still default if the economy recovers too slowly; the trip to missing an interest payment may simply take longer.

http://www.forbes.com/2009/10/23/investments-rating-agency-bonds-markets-economy.html?feed=rss_markets