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Monday, October 25, 2010

On the Value of High Yield

Back in June in a post titled Zombie Nation EconomPic relayed:

Low interest rates are allowing zombie corporations to stick around (i.e. their business models may be dead, the economic environment may be dead, but low financing costs allow them to remain "alive"). But why would someone invest in a company that just a living dead entity?

Investors are willing to take the risk due to the perceived relative value of high yield issuers.
Bloomberg provide the update:
The lowest-rated junk bonds are the most expensive corporate debt following a Federal Reserve- induced rally in high-risk assets, adding to concern fixed- income securities are overvalued.

The extra yield investors demand to hold global bonds rated CCC or lower instead of government debt is about 10.2 percentage points, or 3.3 percentage points narrower than the average over the past 12 years, according to Bank of America Merrill Lynch index data. Debt with B ratings is the only other part of the market trading tighter than its historical average.

Record-low interest rates in the U.S. and Europe, and speculation the Fed will purchase more bonds to keep the economy from faltering, are encouraging debt investors to take on riskier securities and stoking concern prices are rising to unsustainable levels.
I personally don't see the Fed letting off the gas pedal anytime soon, but beware of the impact on liquidity fueled performance when they do.

Source: Barclays Capital