Tuesday, April 6, 2010

Low Quality Tide

Bloomberg details:

Speculative-grade bonds with the highest rankings may offer the best returns after trailing the riskiest debt in a record credit-market rally.

Goldman Sachs Group Inc. is recommending high-yield, high- risk bonds with rankings in the BB tier, the first below investment grade on the Standard & Poor’s scale. Pioneer Investment Management Inc. favors BB and B bonds, the next lowest bracket, while saying the riskiest debt is overvalued. Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data.

Junk bonds have rallied at an unprecedented pace since December 2008 after the market seizure that followed the failure of Lehman Brothers Holdings Inc. Companies are issuing record amounts of the debt as the economy improves, corporate default rates decline and the Federal Reserve holds interest rates at near zero, spurring investors to seek higher yields.

“BBs have been in an unloved space, too risky for investment-grade investors but not risky enough for high-yield investors,” said Alberto Gallo, a strategist at Goldman Sachs in New York. “That has preserved a lot of value.”
Below is a chart showing the outperformance of BB's vs. CCC's. What it also shows is the outperformance of Ca-D's... that is securities in default.



A rising tide (in this case massive liquidity) lifts all ships... in some cases a LOT more than others.

Source: BarCap Live