The value of new junk bonds is rising by the most in at least three years relative to outstanding debt as low trading volume and faster cash inflows into mutual funds force investors to jockey for initial offerings.
New speculative-grade issues have outperformed Barclays Plc’s high-yield index by about 1.8 percent this year, more than in 2011 and 2010.
Notes from Smithfield, Virginia-based Smithfield Foods Inc. (SFD), the largest U.S. pork processor, rose 5.8 cents to 105.3 cents on the dollar since being sold July 18, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Junk-bond fund managers that have received $43.1 billion of deposits this year are struggling to obtain securities as trading volumes decline, reducing the accessibility of older bonds.
The squeeze is exacerbated by a 54 percent drop in monthly debt sales since May, data compiled by Bloomberg show.
It’s “a food fight” for new issues, said Mark Vaselkiv, president of the $9.36 billion T. Rowe Price High Yield Fund.
“The major dynamic that’s affecting the market is a relative scarcity of good quality product. Many of the major high-yield managers are struggling to stay fully invested.”
High-yield, high-risk bonds, graded below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, have returned 9.45 percent this year, including reinvested interest, Bank of America Merrill Lynch indexes show, compared with 8.82 percent for the Dow Jones Industrial Average when including dividends.
Investors are looking further down the credit spectrum in search of returns as the Federal Reserve holds benchmark interest rates near zero through at least late 2014 to help jump-start an economy in which the unemployment rate has held at 8 percent or more for 42 months.
Junk-bond funds received $9.32 billion of inflows in July, the most since February, EPFR Global data show.
“Demand is intense” and the allocations of new bonds “are finite,” Martin Fridson, a global credit strategist in New York at BNP Paribas Investment Partners, said in a telephone interview.
“It’s become tough to buy the acceptable quality paper that the portfolio managers want to own.”
Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds globally rather than government debt narrowed for a ninth week to the lowest level in four months.
The cost of protecting company debt from default in the U.S. declined for a third week to the lowest since May.
In emerging markets, spreads narrowed to the least since March.
Spreads Tighten ...
Source: Argentine Beef Packers S.A.
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