By Patrick McGee and Katy Burne
Yields on "junk"-rated corporate bonds reached their lowest
point on record, according to Barclays.
The Barclays high-yield index, a benchmark index of
below-investment-grade bonds which goes back to 1983, fell to a
record low 6.6073% at Thursday's close, marking a 0.13 percentage
point drop in the past week. Bond yields fall as prices rise.
The final push into record territory came after European Central
Bank President Mario Draghi outlined Thursday how the central bank
would buy short-term bonds from struggling European nations if they
asked for help. Mr. Draghi was delivering on a promise he made in
late July to do "whatever it takes" to save the euro. The
aggressive action was interpreted as a necessary move to save
distressed euro nations and served as a green-light for investors
to purchase riskier assets such as junk bonds and equities.
Investors have also bought risky assets as expectations grow for
the Federal Reserve to announce bond-buying plans of its own at the
central bank's next policy meeting, which concludes on Sept.
13.
The previous record-low yield of 6.61% was set in May 2011,
shortly before Greece's debt problems worsened, touching off over a
year of worries that faltering euro zone economies would trigger a
global credit crunch.
"The market has heard what it wanted to hear out of central
bankers and has responded accordingly," said Sean Slein, portfolio
manager of New York-based First Eagle Investment Management, who
oversees $600 million of junk bonds.
Mr. Slein said he thinks valuations in junk bonds are fair for
now.
But some market participants said the junk-bond rally may be
nearing its limit.
Andrew Feltus, fund manager at Pioneer Investment Management
Inc., said the case for buying more junk bonds is becoming
increasingly difficult with yields so low. He said stocks are
relatively cheap by comparison.
U.S. junk bonds have delivered a total return of 11.05% this
year, versus 13.88% for the S&P 500 stock index. Total return
includes coupon payments and capital appreciation.
Falling yields helped drive junk-bond sales to a record high for
August, and issuance remained strong into September.
Fashion accessories chain Claire's Stores sold $625 million of
new bonds Thursday offering a 8.49% yield. Already the yield on
those bonds has dropped to 8.09% in secondary-market trading,
according to data provider MarketAxess.
Issuance is $205.66 billion so far this year, edging out the
$205.64 billion issued to this point last year, according to
Dealogic data. Much of the new issuance is from companies replacing
older, higher-yield debt, according to Citigroup Inc.
Mr. Feltus said he is concerned about the rise of what he called
"engineered deals," when a company tries to issue as much debt as
it can without sacrificing its current ratings.
"People are thinking, 'How aggressive can I be?'" he said.
Write to Patrick McGee at patrick.mcgee@dowjones.com and Katy
Burne at katy.burne@dowjones.com