With ‘80s Shakeout Over, Junk Bond Market Thrives : Securities: It has staged a comeback marked by increasing calm as well as rising prices.
Instead of wasting away, as some people might have expected, the market for junk bonds seems to be thriving on a national regimen of debt reduction.
The high-yielding, high-risk securities epitomized the financial world of the 1980s, with its emphasis on leverage and casual attitudes toward risk.
Then the junk bond market underwent a violent shakeout, from 1989 to 1991, as some of the biggest issuers and deal makers in the business fell into default or disgrace.
But since then it has staged a comeback marked by increasing calm as well as rising prices.
“After a decade of explosive growth, and three years of extreme volatility, we believe the high-yield market is approaching maturity as a viable financial marketplace for both issuers and investors alike,” says Charles Lemonides, an analyst at Gruntal & Co..
This year junk bonds have run consistently on or near the lead in the investment performance derby.
Over the seven months through July 31, Lipper Analytical Services’ index of mutual funds investing in high-yield bonds posted a total return (price gains plus interest payments) of 13.4%.
“This compares to a total return of 3.4% for the Standard & Poor’s 500-stock index and 4.8% for the Lehman intermediate government bond index,” noted the Value Line Investment Survey.
Like stocks in manufacturing industries, junk bonds have benefited significantly from expectations of a recovery, although progress in that direction has been sluggish.
Indeed, many junk bonds trade a bit like stocks, and thus have gained stature from the prospect that an improved economy will enhance their issuers’ ability to cover interest and principal obligations.
Falling interest rates have also helped significantly. “The credit quality of many high-yield companies has improved as a result of lower interest payments on floating-rate debt, the refinancing of old high-cost debt, the issuance of equity, ongoing cost-cutting efforts and a modest economic recovery,” Value Line observes.
“Support for the market is also provided by positive supply and demand factors. Inflows into high-yield mutual funds remain strong, with total high-yield mutual fund assets approaching $35 billion.
“At the same time that demand is increasing, supply in the new-issue market is likely to moderate, as those companies with the inclination or ability to issue new debt or refinance old debt have already done so.”
Advocates of the market say that all this has helped to validate the basic idea of junk bonds as an alternative to bank loans as a way to raise capital for new enterprises or companies recovering from problems.
The excesses and abuses of the 1980s, they suggest, need not be repeated as long as investors understand and respect the range of risks involved.
“The market remains highly diverse, with, in our opinion, attractive investment vehicles suited to virtually any investment objective,” says Lemonides.
“These range from higher-quality issues offering a relatively stable 9% return to more aggressive issues.”
With all the positive news of late, however, the junk bond market remains an arena where risks must be gauged with a wary eye.