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The junk bond market is finally starting to turn [ClearOnMoney]
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The junk bond market is finally starting to turn

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Commentary

The junk bond market is finally starting to turn

22 Feb 2013 by Jim Fickett.

Junk bond yields have been inadequate to compensate for risk for some time already. Now complaints from professionals about overvaluation, and moves out of the market, are becoming more noticeable. From Bloomberg today:

CI Investments Inc.’s Geof Marshall, the second-biggest Canadian manager of high-yield debt, said the four-year rally in below-investment-grade bonds is coming to an end as companies begin to take on too much risk.

“The high-yield rally is long in the tooth,” Marshall, who manages $6.8 billion as head of high-yield investments, said in a Feb. 20 interview at his Toronto office. …

After using junk bonds to propel his Signature Diversified Yield mutual fund to the top 10 among Canadian balanced funds last year, Marshall is cutting holdings of the securities to 35 percent, from 40 percent in the middle of 2012. …

Marshall joins KKR Financial Holdings LLC, the credit unit of the private-equity firm run by Henry Kravis and George Roberts, which cut a portfolio of high-yield debt by 39 percent in the second half of last year. Loomis Sayles & Co.’s Dan Fuss said last month that the market for junk bonds is “overbought” with “ridiculous” valuations.

About $506 billion of dollar-denominated junk bonds are trading above the price that their issuers may buy them back at later, limiting potential gains, Morgan Stanley data show.

Continued change is likely to come slowly. As institutional investors reduce holdings, more of the worst-rated companies will have trouble refinancing, and defaults will slowly rise. Once a few defaults hit the headlines, retail investors will begin to take notice, accelerating the rise in yield. I'd guess we still have a year or so before junk starts to really run into trouble.