Newswire Quote

Picking A Bottom In Perplexed US High Yield Bond Market

By Tom Sullivan
Of DOW JONES NEWSWIRES
891 words
18 May 2005
14:53
Dow Jones Capital Markets Report
English
(c) 2005 Dow Jones & Company, Inc.

NEW YORK (Dow Jones)--Bottom fishers in the high-yield bond market can't decide whether to take the bait.

After two months of relentless selling, junk bonds staged a rally Wednesday, sending prices in general up 1/2 to a point. But that's not much consolation for investors this year.

Triple-C-rated issues, the riskiest of speculative-grade securities and the most vulnerable to negative sentiment, are down 12 points, or cents on the dollar, year-to-date - including this month's drop of 3 1/2 points. Higher quality issues are down 6 1/2 points year-to-date, including a 1 1/2 point drop so far in May.

Money managers are understandably cautious, unsure if Wednesday's uptick represents just a rally on short-covering or the beginning of a steady reversal in the recent downtrend.

"There's good value in the market but it doesn't mean it won't get cheaper," said Andrew Feltus, vice president and portfolio manager of the Pioneer Global High Yield Fund, with $560 million in assets, who also manages another $850 million in high yield for Boston-based Pioneer. "I've given up trying to call a bottom," he said.

Concerns about the pace and strength of economic growth, stubbornly high oil prices, sagging consumer confidence and recent concerns about the scope of hedge fund losses have all taken their toll on the high-yield bond market.

Returns are down 3.704% year-to-date for an annualized rate around 8%, as measured by the widely followed Merrill Lynch U.S. High Yield Master II Index. In May alone, the index has posted a negative return of 1.235%.

The risk premium on the Merrill index has risen more than 1.50 percentage point over comparable Treasurys from its narrowest levels in March of this year. But buyers have been few.

"That's a huge increase in risk premiums but there doesn't seem to be a lot of optimism out there," said Eric Tutterow, senior director, high-yield corporate finance, Fitch Ratings. "A month ago, I was not optimistic at all" about the market, he said. Now the market is more attractive, and there are pockets of value, "but the overall trend is lower," he said. Tutterow cited the auto sector as a poster child for aversion to risk.

"Collins & Aikman is not going to help matters" if investors start to worry that defaults are beginning to pick up - especially with all the highly-speculative triple-C issuance the market has digested in the past two and a half years, he said.

Troy, Mich.-based auto parts supplier Collins & Aikman Corp. (CKC) filed for Chapter 11 bankruptcy this week. It was the latest blow to an auto sector already rocked by the downgrades of General Motors Corp. (GM) and Ford Motor Co. (F) to speculative grade earlier this month by credit rating agency Standard & Poor's. GM and Ford are two of the largest issuers of corporate bond debt and some people fear they may eventually overwhelm the high-yield market.

But there are some brave souls.

The bankruptcy filing "was widely expected," said Harry Resis, head of U.S. fixed income at U.K.-based Henderson Global Investors, adding that default rates remain very low by historical standards.

The global corporate speculative-grade default rate stood at 1.64% at the end of April, according to S&P, though that is up from March's 1.47%, an eight-year low that may represent the recent cycle's nadir.



Seeking Treasure In Junk Bonds


The negative currents in the market have spooked Mom and Pop retail investors. High-yield mutual bond funds have suffered 13 straight weeks of outflows, as calculated by AMG Data Services Services in Arcata, Calif., totaling some $7 billion.

As a result, the new issue market has almost completely dried up, with issuance this month "on track for (the) slowest month since late summer 2002," wrote Richard Peterson of Thomson Financial, in an email. Thomson tallies just $1.56 billion in new speculative-grade-rated debt from seven issuers through Tuesday.

But the lack of new issuance, and the run-up in risk premiums, has some market participants pausing for a longer look.

"The high-yield market is very, very attractively priced right now," said Resis of Henderson Global. Yield margins on triple-C-rated bonds "may still have some room to widen, but some of the high-rated credits widened for no good reason," he said.

Fitch's Tutterow is less enthusiastic, but also sees reason for giving junk bonds a look.

"Value is created in situations like this with investors exiting so quickly," he said. "Some credits are probably oversold," Tutterow added.

As for Pioneer's Feltus, he's squarely on the fence.

"Maybe if the rally sticks for a coupon of days, we'll see a reversal" of mutual fund outflows, he said, adding that his fund, which usually is fully invested, has 1% to 2% in cash ready to put to work should the market turns anytime soon.

-By Tom Sullivan, Dow Jones Newswires, 201 938-2048;


tom.g.sullivan@dowjones.com