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 securities have 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 0.07 percent loss this month for investment- grade bonds and a 2.32 percent return in 2010. The junk-bond index is being led higher by companies including Freescale Semiconductor Inc. and Energy Future Holdings Corp., formerly known as 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, according to data compiled by Bloomberg.
“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, 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
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.
The extra yield investors demand to own corporate bonds rather than 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.
Central Clearing
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.
Bondholder Protection
The cost to protect against corporate bond defaults in the U.S. rose as the Markit CDX North America Investment Grade Index, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, climbed 0.5 basis point to a mid-price of 83.5 basis points, according to broker Phoenix Partners Group. The gauge typically increases as investor confidence deteriorates.
In London, the Markit iTraxx Europe index of swaps on 125 companies with investment-grade ratings, rose 1.5 basis point today to 75.75 basis points, the highest since March 5, JPMorgan Chase & Co. prices show.
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan increased 2 basis points to 93.5 basis points, Royal Bank of Scotland Group Plc prices show. In Tokyo, the Markit iTraxx Japan index fell 1.5 basis point to 120.5 basis points, on course for its lowest close since Jan. 12, according to CMA DataVision and Morgan Stanley prices.
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.
Risk Appetite
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.
“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.
Freescale Bonds
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.
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.
Speculative-grade companies have issued $42.5 billion of bonds in 2010, already a record first quarter, Bloomberg data show. Junk bond sales totaled $11.8 billion in the first three months of 2009.
“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.
GMAC, Alion
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.
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
