Lows with the Highs; as Investors Await This Week's Federal Reserve Board of Governor's Monetary Policy and Interest Rates Meeting, High- Yield Bond Prices Tumble to Lows Not Seen since the Great Recession. [Derived Headline]

By Browne, John | Tribune-Review/Pittsburgh Tribune-Review, December 12, 2015 | Go to article overview

Lows with the Highs; as Investors Await This Week's Federal Reserve Board of Governor's Monetary Policy and Interest Rates Meeting, High- Yield Bond Prices Tumble to Lows Not Seen since the Great Recession. [Derived Headline]


Browne, John, Tribune-Review/Pittsburgh Tribune-Review


As investors await this week's Federal Reserve Board of Governor's monetary policy and interest rates meeting, high-yield bond prices tumble to lows not seen since the Great Recession.

Historically, this has foreshadowed a slowing economy and falling equity prices. Falling junk-bond markets concern investors, but they can create profit opportunities for corporate acquisitions and astute individual investors.

For about nine years, the Fed has set low interest rates in an effort to pull the nation's economy out of the Great Recession. Investors have been forced to reach for higher yields by accepting riskier junk bonds. Even major institutions such as pension funds, insurance companies and mutual funds have succumbed to this pressure.

The entry of major institutional investors has enabled increasingly riskier companies to raise bond debt. Bloomberg estimates the total junk-bond market now exceeds $2 trillion.

Like all bonds, junk bonds suffer from default risk and increased interest rates. According to Standard & Poors, global corporate defaults are at their highest level since 2009. U.S. defaults are at their second highest level since 2008. This reflects falling corporate revenues and profitability -- and the likelihood of a rate hike.

The International Monetary Fund believes the inflow of huge, highly concentrated junk-bond investments by large financial institutions has created the risk of an evaporation of market liquidity, making sales hard to execute without steep discounts.

"In recent years, factors such as investors' higher risk appetite and low interest rates have been masking growing underlying fragility in market liquidity," Gaston Gates, chief of the IMF's Global Financial Stability Analysis Division, said in September. …

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Lows with the Highs; as Investors Await This Week's Federal Reserve Board of Governor's Monetary Policy and Interest Rates Meeting, High- Yield Bond Prices Tumble to Lows Not Seen since the Great Recession. [Derived Headline]
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