Capital Markets

Junk Market Seems More Appealing

Things are starting to look up again for issuers of speculative-grade debt.
Stephen TaubJuly 12, 2004

Last week, investors pumped about $440 million into junk-bond mutual funds, according to AMG Data Services. This was up from a revised $2.15 million the week before. This was the fastest rate of inflow since the week ended June 2, when investors plunked down $563 million in junk-bond funds.

One major reason is that performance has come back for this asset class. The Merrill Lynch High Yield Master II Index has climbed nearly 4 percent since mid-May, according to Reuters.

Investors apparently seem less concerned about a possible series of rate hikes; a weak jobs report 10 days ago actually sent Treasury rates low.

Meanwhile, credit quality continues to improve for junk bonds. In June, the global junk-bond default rate fell from 2.88 percent the previous month to 2.57 percent, according to Standard & Poor’s — well below the long-term rate of 5.27 percent.

“Expectations for greater economic strength, relatively favorable financing conditions, and improving corporate profitability imply a sanguine outlook for defaults in the near term, with the global default rate continuing to drift lower in 2004,” S&P said in a press release. The ratings agency did warn, however that it is still anticipating a “material increase in defaults” in two to three years.