Junk Bond Market Improves, but Investors Remain Wary
The junk bond market, jarred Monday and Tuesday by the collapse of Drexel Burnham Lambert, regained lost ground early Wednesday, then surrendered some of its advance in later trading.
Prices of top-tier junk bonds were up 1 to 1.5 points after a slide of 2.25 points between Friday and Tuesday, Moody’s Investors Service said. One point represents $10 for each $1,000 in face value of a bond.
Trading was light as most usual participants remained wary, analysts said.
“There was some improvement, but the market’s suffered a lot of shocks recently, and there’s no fundamental change in the way people are viewing things,” said Kevin Mathews, portfolio manager at Van Kampen Merritt, in Lisle, Ill.
Some traders argued that Wednesday’s early rally was due primarily to “short covering”--the purchase of bonds by traders who had earlier sold borrowed bonds in hopes of turning a quick profit when prices fell. “A lot of people thought the Drexel problem would hurt the market more than it did, and (Wednesday) they had to cover themselves,” said Cricket Weaver, a trader at Deltec Securities in Manhattan.
Among advancing issues Wednesday were the widely held bonds of RJR Nabisco, Kroger, Turner Broadcasting and Safeway Stores. RJR Nabisco’s 13.71% bond due in 2007 was up 2.5 points at 64.25; the company’s 13.5% bond due in 2001 was quoted at 91, up 3.25.
Drexel’s bankruptcy removed the biggest player in the junk bond market, the firm that popularized the high-risk, high-yield bonds and underwrote nearly 40% of new issues last year. And its failure came only days after another shock to the junk market--the downgrading of RJR Nabisco bonds by a credit-rating agency over concerns about the big tobacco-and-food firm’s cigarette business.
The market had been pounded even earlier by the bankruptcy filings by the retailing units of Campeau Corp., the Canadian owner of a large collection of U.S. department stores.
Most bonds now are trading at 60% to 80% of their face value, compared to 100% as recently as last summer.
While several mutual funds specializing in junk bonds said redemptions were minimal, there was little active buying by either the funds or insurance companies, the two most active buyer groups when the market is stronger. “The buying there came from the dealers,” Weaver said.
Junk bond yields have continued to drift upward and are now, on average, almost 8 percentage points higher than Treasury bond yields, an all-time high.
Mark Vaselkiv, vice president at the T. Rowe Price mutual fund company in Baltimore, said he is optimistic that the market is heading toward recovery. But he predicted that many institutional buyers will hold back for awhile because of the seemingly unending series of jolts that the market has felt over the last five months.
“They’ve seen a lot of bad news, and at these low price levels they’re nervous,” Vaselkiv said. But he insisted that, with the fall of Drexel and the major bankruptcies of recent months, “there’s just not much more bad news left to happen.”
