Capital Markets

Have Cash, Buy Junk

A surge of interest in below-investment-grade bonds bodes well for an economic recovery.
Stephen TaubFebruary 8, 2008

Here is good news for companies with below-investment-grade credit ratings that want to tap the capital markets: junk-bond mutual funds reported $141.6 million in net inflows in the week ended Wednesday, according to AMG Data Services. This is the first weekly net inflow since December, said AMG. The funds reported net redemptions of $78.1 million the prior week.

Junk bonds — more than any other corporate credit — ebb and flow with the direction of the economy, and the steady drumbeat of recession warnings has scared investors away from this asset class. However, if the past week’s fund flows persist, issuers of junk bonds will be greeted with eager buyers looking to put their new cash to work.

Investors, of course, are also mindful that Moody’s Investors Service continues to raise its forecast for the junk default rate: it is now predicting the default rate will rise to 5.2 percent by the end of the year from 1.3 percent in January. Edward Altman, professor of finance at New York University’s Leonard N. Stern School of Business and a widely regarded expert on the topic, recently predicted a 4.64 percent junk-bond default rate by year-end.

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