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Fed-Induced Rally Makes Riskiest Debt Priciest: Credit Markets
October 28, 2010
The lowest-rated junk bonds are the most expensive corporate debt following a Federal Reserve- induced rally in high-risk assets, adding to concern fixed- income securities are overvalued.
The extra yield investors demand to hold global bonds rated CCC or lower instead of government debt is about 10.1 percentage points, or 3.4 percentage points narrower than the average over the past 12 years, according to Bank of America Merrill Lynch index data. Debt with B ratings is the only other part of the market trading tighter than its historical average.
Record-low interest rates in the U.S. and Europe, and speculation the Fed will purchase more bonds to keep the economy from faltering, are encouraging debt investors to take on riskier securities and stoking concern prices are rising to unsustainable levels. Goldman Sachs Group Inc. advised its clients to avoid adding CCC rated debt in a report published Oct. 22 because of slower economic growth.
“With CCCs even more richly valued than historically, the risk of poor relative returns in the future would appear to be high,” said Martin Fridson, a global credit strategist in New York at BNP Paribas Asset Management, who began his career as a corporate debt trader in 1976. “You have to be conscious of that risk of underperformance. Having relatively rich valuations puts investors at a handicap.”
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