Junk bond yields fall to all-time lows

JUNK bond yields are at an all-time low, according to a widely watched Merrill Lynch index, as investors disappointed by the returns on higher-rated bonds pour billions of dollars into the market for speculative-grade debt. 


The average yield of bonds included in the Merrill Lynch High Yield Master II index dropped to 6.837 per cent, slipping under the previous low of 6.863 per cent in December 2004.

Through the first six weeks of 2011, as the Federal Reserve has held short-term interest rates near zero, investors have increased their stakes in mutual funds focused on junk bonds by a net $US4.6 billion ($4.5bn), and by $US5.4bn for funds focused on leveraged loans, a related risky asset class, according to Lipper FMI, a unit of Thomson Reuters.

The average junk bond now trades at US103.89 cents for every US dollar of face value, according to the Merrill index. The average risk premium -- the additional return investors get to buy these bonds rather than Treasuries -- is now 4.54 percentage points over comparable Treasury bonds, down from 6.22 in early December, according to the Merrill index.

"You've got to understand: what's your alternative?" said Carl Kaufman, high-yield portfolio manager at Osterweis Capital Management in San Francisco.

"Rates are starting to creep up, and you're starting to see increased risk in Treasuries and investment-grade corporates. The only counter-argument is that based on past performance, when (junk bonds) get to this level they should be sold."

This has translated into markedly lower borrowing costs for companies.

Ford Motor's Ford Motor Credit, for example, sold $US1.25bn of 10-year notes earlier this month to yield 5.75 per cent; last April, it sold $US1.75bn of notes with a shorter maturity, five years, at a significantly higher yield of 7.125 per cent.

Similarly, Chesapeake Energy sold $US1bn of 10-year notes last week to yield 6.125 per cent; in February 2009, the company sold $US425 million of six-year notes to yield 10 per cent.
The high-yield rally has also benefited buy-and-hold investors.

Junk bonds have enjoyed a remarkable two-year bull run, returning 15.2 per cent in 2010 and 57.5 per cent in 2009, according to the Merrill index.They have already gained 3.1 per cent so far this year.
As recently as December 2008, the average junk bond traded for 55.4 cents per dollar of face value and yielded 22.1 per cent.

Investors buying into the market at current levels, however, are getting paid less than ever before.
Market participants are divided over whether the market is poised for a fall.

Many note that risk premiums are near their historic average of roughly 5 percentage points above Treasuries and far from their low of 2.41 percentage points reached in May 2007. When yields hit their low point in 2004, risk premiums measured 3.1 percentage points.

Similarly, risk premium, also known as spread over Treasuries, now accounts for roughly two-thirds of total junk-bond yield, but could fall further before reaching its long-term median ratio of 57 per cent, said Adrian Miller, strategist at Miller Tabak Roberts Securities.

"While the decline in the ratio from its peak (in 2008) has been significant, down 32 per cent, this measure of relative value has room to go," Mr Miller wrote in a note this week.Martin Fridson, global credit strategist at BNP Paribas Investment Partners, said the current average risk premium is only slightly tighter than would be expected given the current low default rate, ample credit availability and the level of economic output.

"In valuing corporate bonds, it does not really matter how spreads have changed over the past month or quarter, or how they compare with some historical average," Mr Fridson wrote this week.

"Spreads are risk premiums, so if risk is below average, a comparably below-average spread does not indicate that the bonds are rich."

Investors see continued downward pressure on yields as long as the Federal Reserve continues to suppress short-term interest rates, particularly through its current, second round of quantitative easing, known as QE2.

"There has to be a natural end obviously, I just don't know when," Mr Kaufman of Osterweis said. "It's probably going to coincide with the end of QE2."
 

Japan May Face ‘Irreversible’ Blow to Power Capacity

Japan may face “irreversible” damage to power-supply capacity from the March 11 earthquake, limiting business activity, Citigroup Inc. said.

“Particularly worrying is the serious blow to the power supply in eastern Japan,” Kiichi Murashima, chief economist at Citigroup Global Markets Japan in Tokyo, said in an e-mailed note dated yesterday. “It is difficult to tell how long this will remain a drag on corporate activity.”


Power supply may be reduced by 54 percent under a worst- case scenario to companies reliant on Tokyo Electric Power Co., Murashima said. That calculation is based on the company suspending operations at all nuclear plants and thermal power plants being unable to resume operating, the note said.

The Nikkei 225 (NKY) Stock Average resumed its slide today as helicopters dumped water on uranium and plutonium fuel rods at a reactor at Tepco’s Fukushima Dai-Ichi power station and after a U.S. official warned of radiation dangers. The benchmark was down 2 percent as of 10:57 a.m. local time after earlier falling as much as 5 percent.

Tepco supplies 32 percent of Japan’s electricity, according to Murashima.

Citigroup’s ``base case'' is that the partially operating Kashiwazaki-Kariwa plant keeps going, other nuclear power stations do not, and operations at thermal stations return to normal “quickly.” Here, the calculation is for a 20 percent reduction in supply to companies reliant on Tepco.

“Reconsidering the economic impact of the earthquake, we cannot help but feel that Japan’s supply capacity may have been irreversibly damaged,” Murashima said.

To contact the reporter on this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

Japan Crisis and Updates on it

Japanese earthquake caught many by shock , and with the sheer magnitude as well as destruction the government which already is struggling with the highest debt load which much more problems to tackle off. 

In the first two days of the week, we saw a huge sell off across all the major markets , and the commodities markets alike. While the sell off on the equities market was taken too far not only in Japan, but many countries around the world, the sell off in the precious metal market came as a shock. 

The obvious reason for the precious metals market in the last couple of years, as the fear that governments around the world would , and have to print more money to fill the huge budget gap they all face.While the obvious reasons do & did come to light people ran for safety ( which in a scary market like this was no where to be found)

Its times like these ( Unfortunately in some cases) when the markets do react irrationally as compared to the magnitude of the problem, that many good companies can either be found at bargain prices , or few decent companies can work as amazing trading positions ( given you are in the market already, and know their intrinsic values to begin with) .

All, I would like to say is stop listening to the crowd and the noise and follow the facts and look for investments/trading positions . There are many out there in the market already. As the saying goes on Wallstreet , "Bears make money , bulls make money , its pigs who get slaughtered"

Unfortunately for those who where expecting any investment advice , we do not provide it at the moment ( There is no free lunch in this world) . Anyways , keep updated for the research reports coming out by the end of the week.

-Valuee Investor Team