Yields on speculative-grade corporate debt in the U.S. dropped to an unprecedented 7.163 percent yesterday, breaking the previous record set more than 15 months ago.
Borrowing costs on the Bank of America Merrill Lynch U.S. High Yield Master II index have declined from 8.465 percent at the beginning of this year and a high of 22.651 percent in December 2008. Yields broke the previous record of 7.187 percent from May 19, 2011.
Yields are tumbling as issuers sell junk debt at the fastest pace on record as default rates remain below historic averages and the Federal Reserve pledges to keep borrowing costs low into 2014. Demand is intense enough to lead Bank of America Corp. analysts to say last month that prices were approaching "bubble levels."
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Investors are "moving into riskier assets, with comfort growing that the Fed is going to be there to keep rates low for a decent amount of time," Mark Pibl, head of credit strategy at broker-dealer Cortview Capital Securities LLC, said in a telephone interview. Inflows have led to funds "building for many fixed-income investors over the last three months."
Yields on junk debt compare with 2.996 percent for U.S. investment-grade bonds as of yesterday, up from an unprecedented 2.978 percent on Sept. 3, Bank of America Merrill Lynch index data show.
The benchmark 10-year Treasury rate reached 1.701 percent yesterday, down from 1.876 percent at the end of last year, according to data compiled by Bloomberg.
Default Rates
"With rates where they are, people are looking to get any yield they can," Rob Crimmins, a money manager in New York at RS Investments, which oversees $30 billion, said in a telephone interview. "Default rates are pretty low, so it gets people comfortable with the sector."
The global default rate for high-yield debt will be at least 1.7 percentage points below its historical average, Moody's said in a Sept. 10 report. The trailing 12-month rate was 3 percent in August, compared with a historical average of 4.8 percent. Moody's sees the rate at 3.1 percent by year-end.
High-yield bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- by S&P.
The $52.4 billion deposited into high-yield funds globally this year through Aug. 29, compares with $8.3 billion in 2011 and $31.5 billion in 2010, as measured by Cambridge, Massachusetts-based EPFR Global.
Sales of high-yield debt in the U.S. this year total $208 billion, the fastest pace on record, according to Bloomberg data.
"The potential return on high yield looks attractive in current economic and financial market circumstances," said Edward Marrinan, macro credit strategist at Royal Bank of Scotland Plc in Stamford, Connecticut. "Central bank policies are clearly influencing market behavior. By compressing yields across the term structure, central bankers are pushing investors into riskier asset classes."
Bloomberg News
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