January 23, 2009 / 9:42 PM / 11 years ago

US junk bond sales jump 75 pct to $3.4 bln in January

NEW YORK, Jan 23 (Reuters) - U.S. junk bond sales have jumped 75 percent in January to $3.4 billion, a sign that riskier assets are joining in a general credit market thaw.

January’s total is the highest since June, when $8.4 billion in high-yield bonds were sold, according to Thomson Reuters data. Just $1.9 billion were sold in January 2008.

Junk bonds have rallied since December as record high yields above 22 percent attracted cash into the market. Junk, or high-yield bonds, posted a 7.47 percent total return in December and have gained 4.66 percent in the month to date, according to Merrill Lynch data.

Low interest rates on safe-haven U.S. Treasuries and money market funds and last year’s massive losses in equities have prompted investors to move cash into high-yield bonds, strategists said.

“Investors are increasingly recognizing the benefits of yield product,” said Peter Toal, head of high-yield capital markets, Americas at Barclays Capital in New York. “Buying high-yield today with double-digit yields to some investors, can be pretty attractive when they’re not earning anything in the money markets.”

Junk bond sales evaporated late last year as the worst credit crisis in generations caused investors to shun risk. With many Wall Street dealers scrambling to curb their own risk exposure, the amount of junk bonds on dealers’ inventories was also cut to the bare bones.

Now that the market is rallying, new issues are the only place many investors can find large blocks of bonds.

“If accounts have cash and want to put a meaningful amount to work, they’re finding that opportunity in the new issue market,” said Toal.

Junk bonds are a key financing source for hundreds of companies and the shuttered market had raised fears of a steep rise in defaults as firms lost access to cash. But the riskiest, most distressed companies would still have a hard time selling debt, investors said.

“There is demand out there, but people aren’t necessarily looking to take risk,” said Andrew Feltus, portfolio manager at Pioneeer Investment in Boston.

Since new issues are coming from better-quality, high-yield companies, they are offering yields of about 11-12 percent, compared with the 20 percent seen on riskier bonds, he noted.

“It’s something companies can afford, but it’s still a relatively attractive yield compared to investment grade at say, 8 percent,” he said.

INVESTORS CAUTIOUS

Investors are cautious as high-yield defaults are poised to more than triple over the next year. Moody’s Investors Service last week said the U.S. default rate will likely rise to 15.3 percent in the next year from 4.4 percent at the end of 2008.

The all-time high was 15.9 percent during the Great Depression.

Still, investors are betting that many high-yielding bonds will escape default, paying them to take the risk.

“It’s pretty easy even if you have a very high default rate to get a double-digit yield,” said Pioneer’s Feltus.

In a sign of strong demand, several of this week’s deals were boosted in size and prices rose after the sale.

An issue of 9 percent notes due in 2015 sold by wireless tower operator Crown Castle International Corp on Thursday at 90.42 cents on the dollar rose to 93.375 cents on the dollar on Friday, according to MarketAxess.

High-yield bonds still face headwind this year, notably a widely expected slump in earnings, sluggish economy and double-digit defaults.

Borrowers also may be taking advantage of the ebullient market before the Treasury begins selling debt to pay for its massive financial bailouts, strategists said.

“At the back of the mind of any CFO in Corporate America is the U.S. Treasury is going to have to come in and issue a massive amount of debt,” said Scott MacDonald, head of research at Aladdin Capital in Stamford, Connecticut.

“One of the concerns I would have as a corporate CFO is I want to get in there before there is more government stuff coming into the market and crowding me out,” he said. (Reporting by Dena Aubin; editing by Gary Crosse;) (dena.aubin@thomsonreuters.com; +1-646-223-6325; Reuters Messaging: dena.aubin.reuters.com@reuters.net))

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