Junk Bond Demand Rises Despite Yields

Investors are continuing to snap up corporate junk bonds even as average yields on the securities fall to their lowest levels since mid-1999.

AES Corp., an independent power company, on Wednesday boosted the size of its new junk debt offering to as much as $1.8 billion from a planned $1 billion, amid strong demand, market sources said.

By Friday, the Arlington, Va.-based firm expects to sell as much as $1.2 billion in notes maturing in 2013 and up to $600 million in notes maturing in 2015, the sources said. The annualized yields on the notes are expected to be 8.75% and 9%, respectively.

Wall Street has been clamoring for new issues in the junk market as more investors have sought the bonds this year.

Rising demand for junk, or below investment grade, securities reflects investors’ optimism that the economy will continue to recover, boosting the financial health of many struggling companies, analysts say.

As prices of junk bonds are bid up their yields decline. The yield on an index of 100 junk issues tracked by KDP Investment Advisors fell to 9.01% Wednesday from 9.05% Tuesday, and now is the lowest since mid-1999. The yield was at 10.72% at the start of this year.

Many junk-bond mutual funds have scored double-digit “total” returns already this year, meaning price appreciation plus interest earned. The Putnam High Yield A fund is up 10.8%, for example. The Pimco High Yield A fund is up 11.7%.