12
mar

High Yield beats Investment Grade Debt

Escrito el 12 marzo 2010 por Antonio Rivela Rodríguez en Financial Markets

For the sake of clarification, High Yield (HY=Junk Bonds) holds BBB- rating and Investment Grade (IG) enjoys higher or equal than BBB-.

For example GM and Ford are High Yield because they were downgraded in 2005 from BBB to BB.

Why is HY beating IG?: Very Simple. It does not come as a surprise to market participants.

HY trades at libor+5% / libor+10% levels. So going from 10% to 4% is a 6% annualised which in 10 years is 48%/50% !

See below an interesting Bloomblerg article on HY vs IG.

March 12 (Bloomberg) — High-yield, high-risk bonds are beating investment-grade debt for the first time this year as confidence in the U.S. economic recovery gains strength.

Speculative-grade notes returned 1.93 percent this month, bringing year-to-date gains to 3.63 percent, according to Bank of America Merrill Lynch index data. That compares with a 2.32 percent return in 2010 for investment-grade bonds. The junk index is being led higher by companies including Freescale Semiconductor Inc. and Energy Future Holdings Corp., formerly TXU Corp.

Lenders to the neediest borrowers are willing to accept the lowest relative yields since January as confidence in the global economy spurs Morgan Stanley to boost its growth estimate for 2010 to 4.4 percent from 4 percent. Speculative-grade credit rating upgrades by Moody’s Investors Service are poised to outpace downgrades for the second consecutive quarter, the first time that’s happened since 2006, Bloomberg data show.

“It’s a yield grab,” said Jack Iles, an investment manager at MFC Global Investment Management in Boston who helps oversee $4 billion in fixed-income assets.

The extra yield investors demand to own high-yield bonds instead of Treasuries has narrowed for nine straight days to 6.15 percentage points, the longest streak of spread tightening since August, Bank of America Merrill Lynch data show. The spread had widened to 7.03 percentage points on Feb. 12 from 6.39 percentage points in December on concern the fallout from Greece’s budget deficit, Europe’s biggest in terms of gross domestic product, would slow the global economy.

‘Bit of a Stumble’

“Risky assets took a little bit of a stumble from January to mid-February and that was by and large wrapped up with concerns over sovereign debt,” said Christopher Garman, president of Orinda, California-based Garman Research LLC. “Those concerns seem to have more or less faded.”

Emerging-market and high-yield bond funds each took in more than $1 billion in the week ended March 10, EPFR Global said, the biggest amount since the research firm began publishing weekly data on the sectors a decade ago.

Elsewhere in credit markets, Lyondell Chemical Co. said it plans to raise $6.05 billion in bonds, loans and equity to repay debt after it emerges from bankruptcy protection. The chemical maker, based in Houston, is seeking $3.25 billion by selling senior secured bonds and borrowing through a senior term loan, according to a statement yesterday. It also plans to raise $2.8 billion in a rights offering.

Fannie Mae

Fannie Mae sold $6 billion of debt, its biggest offering of benchmark notes since last April, as the company boosts borrowing and cuts holdings to fund about $130 billion of planned purchases of delinquent loans from the mortgage securities it guarantees. The 3-year debt from the government- controlled mortgage company yields 1.803 percent, or 31 basis points more than similar-maturity Treasuries, Washington-based Fannie Mae said in a statement.

CLP Holdings Ltd., Hong Kong’s biggest electricity supplier, plans to sell about $500 million of 10-year bonds today priced to yield about 125 basis points more than similar- maturity U.S. government debt, according to a person familiar with the matter.

U.S. commercial paper outstanding rose $11.2 billion to $1.14 trillion in the week ended March 10, after declining by $20.4 billion in the previous period, the Federal Reserve said on its Web site. Commercial paper, which typically matures in 270 days or less, is used to finance everyday activities such as payroll and rent.

Spread Narrows

The spread on corporate bonds over government debt fell yesterday to 158 basis points, or 1.58 percentage point, the lowest this year, from as much as 174 basis points Jan. 4, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 4.044 percent.

Companies took advantage of the drop in spreads to sell more bonds. Corporate borrowers in the U.S. issued $36.4 billion of notes through yesterday, compared with $21 billion in all of last week, according to data compiled by Bloomberg. It was the most since the week ended Jan. 5, when $46.6 billion was sold.

Investment-grade companies in Europe sold 19.2 billion euros ($26.5 billion) of bonds this week, almost double the amount raised the week before, Bloomberg data show.

Bond Risk Falls

The cost to protect against corporate bond defaults in Europe fell today, with the Markit iTraxx Crossover Index of credit-default swaps on 50 mostly high-yield companies dropping 10 basis points to a two-month low of 408, according to JPMorgan Chase & Co. prices.

The European index soared to 506 basis points Feb. 16 at the height of investor concern Greece wouldn’t be able to rein in the region’s largest budget deficit. Credit swaps on Greek government bonds rose 5 basis points to 307, against a record- high 428 reached on Feb. 4, CMA DataVision prices show.

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan increased 2 basis points to 93.5, Royal Bank of Scotland Group Plc prices show. In Tokyo, the Markit iTraxx Japan index fell 1.5 basis point to 120.5, on course for its lowest close since Jan. 12, according to CMA and Morgan Stanley prices.

The Markit CDX North America Investment Grade Index, which is linked to 125 companies, climbed 0.5 basis point to 83.5 yesterday, according to broker Phoenix Partners Group. The credit-swaps gauges typically rise as investor confidence deteriorates.

Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 a year on a contract protecting against default on $10 million of debt for five years.

Credit-Swaps Regulation

Central clearing of derivatives including credit-default swaps will come under scrutiny as part of efforts to safeguard the European Union’s financial system. At a meeting on March 22, EU nations and the European Commission will examine ways to cut the risk in the event that one of the parties to a derivatives contract can’t meet its obligations, according to a document obtained by Bloomberg News.

Clearinghouses for swaps transactions should be open to any firm that wants to process trades in the $300 trillion U.S. market, according to Commodity Futures Trading Commission Chairman Gary Gensler.

“Clearinghouses should not be allowed to discriminate between or amongst the trades coming from one trading venue or another,” the chairman said in prepared remarks at the Futures Industry Association conference in Boca Raton, Florida.

Signs that the U.S. economy is improving are bolstering demand for speculative-grade securities, according to Martin Fridson, chief executive officer of money manager Fridson Investment Advisors.

‘Healthy Appetite’

“There is a healthy appetite for risk,” Fridson said. “There is a fading of concern over Greece and more upbeat economic numbers.”

Morgan Stanley expects “above-consensus global GDP growth,” raising the projection from December, “despite growth downgrades in Europe,” a weaker first quarter in the U.S. and “recent softening” in a China manufacturing index, the firm’s economists said March 10.

The Organization for Economic Cooperation and Development said March 5 its leading indicator, which signals the direction of the economy, reached the highest in almost 31 years in January.

The measure increased by 0.8 point to 103.6 from 102.8 in December, the Paris-based organization said. January’s reading was the highest since May 1979. Gains on the month were led by Japan, the U.S., Canada and Germany, the OECD said.

High-Yield Spreads

High-yield spreads will narrow to 4 percentage points by yearend as defaults plunge, according to Garman. Moody’s predicts the speculative-grade default rate will decline to 2.9 percent by the end of 2010 from 11.6 percent in February. The rate fell from 12.5 percent in January.

The worst-rated bonds are performing the best this month. Securities ranked CCC and lower have gained 2.77 percent while BB rated notes, the highest junk tier, have returned 1.81 percent, Bank of America Merrill Lynch data show. High-yield securities are rated below Baa3 by Moody’s and lower than BBB-by Standard & Poor’s.

Bonds of Freescale, the computer chipmaker bought by firms led by Blackstone Group LP, have climbed 5.36 percent on average and debt of Energy Future, the power producer taken private by KKR & Co. and TPG, has returned 4.27 percent, Bank of America Merrill Lynch data show. Austin, Texas-based Freescale is rated Caa2 by Moody’s and B- by S&P. Dallas-based Energy Future is rated Caa3 and B-, respectively.

New Issues

The bonds are rallying in part because the unthawing of the new issue market has given the riskiest companies the ability to refinance their debt, said MFC Global’s Iles.

“The reopening of the new issue market was huge for these guys,” Iles said. “The ability for companies like TXU to restructure even part of their balance sheet is much better than it was even six months ago.”

Lisa Singleton, a spokeswoman for Energy Future and Freescale spokesman Robert Hatley declined to comment.

Among high-yield borrowers selling debt this week were GMAC Inc., which sold $1.5 billion of 8 percent, 10-year bonds, and McLean, Virginia-based Alion Science & Technology Corp., which issued $310 million of 12 percent payment-in-kind notes that can pay interest in the form of added debt.

Insurance companies were the best performing industry in the Bank of America Merrill Lynch U.S. High Yield Master II Index with gains of 6.63 percent this month. Bonds of American International Group Inc., once the world’s largest insurer, have risen to the highest levels in 18 months after the New York- based company said March 1 it was selling AIA Group Ltd. to Prudential Plc for $35.5 billion.

Financial service company debt, the second-best performing sector, gained 3.64 percent and restaurant company bonds followed with returns of 3.13 percent, index data show.

In Spain many advisory firms like netvalue consultants do analyse HY investments and related derivatives.
To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net

Antonio Rivela

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