Loans are yielding more than high-yield bonds for the first time amid recent "gyrations" in the credit market, according to Bank of America Corp.
Leveraged loans are yielding 9 percent after adjusting for fixed-rate differentials and floors on the London interbank offered rate, compared with 8.7 percent for U.S. high-yield bonds, Oleg Melentyev and Christopher Hays, New York-based Bank of America strategists, wrote in a Sept. 2 research report.
Loan yields have jumped on concern about a possible double-dip recession and the Federal Reserve's pledge to keep its benchmark rate at a record low through at least mid-2013, Melentyev said today in a telephone interview. Bonds typically yield 100 basis points to 150 basis points more than loans, he said. A basis point is 0.01 percentage point.
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"The 30-bp gap between the two yields is the widest it has ever been in history, and in fact the first observation ever when loans are yielding more than bonds," Melentyev and Hays wrote in the report. "In a sense, investors are being paid to be in a more senior asset class, which doesn't make too much sense in a long run."
About 45 percent of outstanding loans have Libor floors, which average 150 basis points, according to the report. Three-month Libor, a rate banks charge to lend to each other, increased for a 30th consecutive day to 0.336 percent for dollar loans, the highest since Aug. 19, 2010, and the longest rising streak since November 2005.
Price Gap
Leveraged loans and high-yield bonds are a type of speculative-grade debt ranked less than Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.
In May 2007, the yield gap narrowed to zero when "we were beginning to realize we were in for a significant slowdown" and there was an "overhang" of leveraged buyout loans, Melentyev said.
The average price of the S&P/LCD loan index is 89.4 cents on the dollar, according to the report. That compares with 97 cents for high-yield bonds and represents the widest price gap on record going back to 1997, Bank of America said.
Bloomberg News
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