Thursday, July 5, 2007

Junk Bond Market About to Take A Hit?

Right now, the spread between junk bonds and treasury debt is very tight. This indicates that junk bonds have reallied over the last few years. It also indicates there may be a pricing mis-match in the market. Junk debt has more risk, yet is not trading like it has more risk.


Junk bonds lost 1.61 percent last month, the most since March 2005 when GM forecast its biggest quarterly loss since 1992. Junk bonds globally returned 2.88 percent in the first half, the lowest in two years, according to data from New York- based Merrill Lynch.

Investors withdrew $502 million from high-yield mutual funds in the week ended June 20, the most since September 2005, according to AMG Data Services in Arcata, California.


``Demand has spiraled out of control,'' said Sethi, who helps oversee $2 billion at Fidelity International, an affiliate of Boston-based Fidelity Investments. ``We think the market is overpriced. There's a little bit more scope for spreads to tighten, but a lot more scope for widening.''

If this trend continues, it will be another sign that the LBO market will at minimum go through a minor shake-out.