High- yield bond market troubles may herald worse to come
Hard times for high- yielding bonds may presage more rough days for the stock markets and the economy. Investors typically demand higher returns on high- yield debt ie junk bonds, to compensate for the risk that the issuers could go broke and not pay them back.
But in recent years default rates have been low and institutions and individual investors in search of higher payouts have snapped up billions of dollars worth of these bonds or mutual funds that specialize in them. Among the companies whose debt trades as junk are Qwest Communications International Inc., Nextel Communications Inc. and El Paso Corp.
Now investors are backing away from junk bonds as the economy shows signs of slowing and the Federal Reserve keeps bumping up interest rates.
Almost $1.5 billion in high-yield bond offerings were postponed last week, some leveraged buyout deals could be in trouble, and mutual fund investors are starting to cash out of high-yield bond funds.
Many of the factors causing the junk bond market to cool are unique to it.
The fear is that those downgrades will mean the junk-bond category will be awash with new debt. The total value of junk securities is about $900 billion. GM’s rated debt, which doesn’t include the car loans its financing arm makes to customers, total $200 billion, according to Standard & Poor’s.
The volume of GM debt has investors worried that some institutions, including insurance companies and state pension funds, would be forced to unload their GM bonds because of rules requiring them to only hold investment-grade securities.
Other factors affecting the high-yield market are the same as fears roiling stock markets in recent weeks: The fear of inflation and anticipated interest-rate increases, which make sitting on cash look more attractive.
The change in the economic outlook follows a period when conditions in the junk bond market were close to ideal: Stocks weren’t too volatile and interest rates were low. During the second half of 2004 and the beginning of 2005, virtually any deal could get done, the market was not discriminating. That’s changed.
Three deals worth almost $1.5 billion, for junk bonds from Cheniere Energy Inc., Diamon Inc. and Hughes Network Systems were all postponed last week.
Banks trying to sell high-yield debt also are finding fewer buyers. A $3 million deal might get done, while a $3 billion deal might not get done because there aren’t enough players.
Mutual fund investors are also getting nervous. They’ve pulled $1 billion out of high-yield bond funds in the last 10 days, while the total outflow for all bond funds was $1.3 billion, said Charles Biderman, president of Trim Tabs Investment Research, which tracks the flow of money in and out of the stock market and mutual funds.
Investors aren’t leaving because they were losing a dramatic amount of money. Junk- bond funds declined only 1.3 percent in value, on average, in the last two weeks.
But in recent years default rates have been low and institutions and individual investors in search of higher payouts have snapped up billions of dollars worth of these bonds or mutual funds that specialize in them. Among the companies whose debt trades as junk are Qwest Communications International Inc., Nextel Communications Inc. and El Paso Corp.
Now investors are backing away from junk bonds as the economy shows signs of slowing and the Federal Reserve keeps bumping up interest rates.
Almost $1.5 billion in high-yield bond offerings were postponed last week, some leveraged buyout deals could be in trouble, and mutual fund investors are starting to cash out of high-yield bond funds.
Many of the factors causing the junk bond market to cool are unique to it.
The fear is that those downgrades will mean the junk-bond category will be awash with new debt. The total value of junk securities is about $900 billion. GM’s rated debt, which doesn’t include the car loans its financing arm makes to customers, total $200 billion, according to Standard & Poor’s.
The volume of GM debt has investors worried that some institutions, including insurance companies and state pension funds, would be forced to unload their GM bonds because of rules requiring them to only hold investment-grade securities.
Other factors affecting the high-yield market are the same as fears roiling stock markets in recent weeks: The fear of inflation and anticipated interest-rate increases, which make sitting on cash look more attractive.
The change in the economic outlook follows a period when conditions in the junk bond market were close to ideal: Stocks weren’t too volatile and interest rates were low. During the second half of 2004 and the beginning of 2005, virtually any deal could get done, the market was not discriminating. That’s changed.
Three deals worth almost $1.5 billion, for junk bonds from Cheniere Energy Inc., Diamon Inc. and Hughes Network Systems were all postponed last week.
Banks trying to sell high-yield debt also are finding fewer buyers. A $3 million deal might get done, while a $3 billion deal might not get done because there aren’t enough players.
Mutual fund investors are also getting nervous. They’ve pulled $1 billion out of high-yield bond funds in the last 10 days, while the total outflow for all bond funds was $1.3 billion, said Charles Biderman, president of Trim Tabs Investment Research, which tracks the flow of money in and out of the stock market and mutual funds.
Investors aren’t leaving because they were losing a dramatic amount of money. Junk- bond funds declined only 1.3 percent in value, on average, in the last two weeks.
April 29, 2005
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