Newspaper article International Herald Tribune

Still Stars, Even with Lower Yields

Newspaper article International Herald Tribune

Still Stars, Even with Lower Yields

Article excerpt

During the first quarter of this year, a record $133 billion of such bonds were sold around the world. At the same time, the yield on such bonds has fallen to the lowest level on record.

Junk bonds have never been more popular, even if they no longer deserve to be called high-yield bonds, the more polite description that Wall Street prefers.

During the first quarter of this year, a record $133 billion worth of such bonds were sold around the world. While sales in the United States fell a little short of the record set in the third quarter of last year, that was more than made up for by rising sales in Europe and Asia.

At the same time, the yield on such bonds has fallen to the lowest level on record. The Bank of America Merrill Lynch U.S. High Yield Index yielded 5.7 percent at the end of the quarter, as can be seen in the accompanying graphic. That was down from 6.1 percent at the end of the year, and from 8.3 percent at the end of 2011.

Junk bonds are those rated below investment grade by the bond rating agencies, and their current popularity reflects the search for yield by many investors, whose alternatives include savings accounts that pay almost nothing.

To some, that is cause for concern. In a speech to the Economic Club of New York last week, William Dudley, the president of the Federal Reserve Bank of New York, pointed to "potential excesses in certain corners of the financial markets," saying the high-yield market and the related leveraged loan market "do seem somewhat frothy."

He added, however, that even if those markets did suffer major setbacks, the overall economy might not be badly affected. "The size of the asset classes in question is relatively modest, and most of the investors in these assets are not highly leveraged," he said. "So if asset valuations were to adjust sharply and some investors experienced painful losses, I do not expect that such a shock would threaten financial stability."

Since the end of the past century, high-yield bonds have generally done better than stocks in good markets -- and better than stocks in bad markets as well. In 2008, the Merrill Lynch high- yield index fell 26 percent, while the total return of the Standard & Poor's 500 stock index was a negative 37 percent. …

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