Loan fears trigger junk bond sell-off

U.S. junk bonds sold off sharply Friday as investors continued to pull back from high-risk securities.

Analysts said renewed fears this week about a prolonged meltdown of mortgage-related bonds backed by sub-prime loans was triggering selling in the junk bond market as well.

As prices fell, yields on junk bonds surged. The annualized yield on an index of 100 junk issues tracked by KDP Investment Advisors rocketed to a 12-month high of 8.12% from 8.02% on Thursday. The yield had been 7.02% at its low in February.

Rising yields on junk securities will make it more expensive to finance the corporate takeover boom that has underpinned the stock market.

“I think you would have a real hard time selling an LBO [leveraged buyout] deal,” said Robert Grimm, co-head of the high-yield group at J. Giordano Securities in Stamford, Conn.

Many traders said the volume of junk bond trading wasn’t huge. The price declines, they said, largely reflected a repricing of securities by skittish Wall Street dealers.

Instead of providing liquidity by buying bonds, major brokerages are “just watching prices go down,” said Kingman Penniman, head of KDP in Montpelier, Vt.