Wednesday, 11 February 2015

Investors Are Jumping Back Into Junk Bonds

ECB President Mario Draghi

Mario Draghi, president of the European Central Bank, pauses during a news conference to announce 
the bank's interest rate decision at the ECB headquarters in Frankfurt, on Jan. 22. 
Photographer: Martin Leissl/Bloomberg

4:50 PM PST
February 10, 2015

(Bloomberg) -- Less than two months after fleeing junk bonds amid a plunge in oil prices, investors are embracing riskier company debt.

After pulling more than $16 billion last year, investors have poured $4.97 billion into U.S. high-yield mutual funds and exchange-traded funds since December, according to Lipper. BlackRock Inc.’s junk-bond ETF, the largest of its kind, has seen inflows during each of the last 13 days, the longest streak of deposits in more than two years.

Junk bonds are benefiting from demand for higher-yielding assets as the European Central Bank’s new round of bond purchases pushes yields on more than $1.7 trillion of debt worldwide below zero. The resurgence is sending down borrowing costs for speculative-grade borrowers and reopening a new-issue market that all but shut at the end of the year as oil tumbled below $45 a barrel from more than $107 in June. A rebound in crude has also boosted risk appetite.

“With rates getting so low, you look at high-yield and it doesn’t look so bad,” Jack Flaherty, a money manager at New York-based GAM USA Inc., which oversees $17 billion, said in a telephone interview. “That has brought investors back in after the volatility at the end of last year scared them away. The fears from weak oil, while not gone, have lessened.”
Yields Fall

Yields on junk debt worldwide have declined 32 basis points since the ECB announced a trillion dollar bond-purchase program on Jan. 22 to 6.73 percent, according to Bank of America Merrill Lynch Indexes. That’s still up from the all-time low of 5.64 percent in June.

Last year, investors dumped U.S. energy securities, as tumbling oil prices sparked concern that the speculative-grade debt that comprised 15 percent of the entire market would default. The bonds lost 7.4 percent, according to Bank of America Merrill Lynch index data.

Now that oil prices are rallying, investors are diving back in. Last week, crude prices jumped 7 percent, the biggest percentage increase in almost four years, and mutual funds in the U.S. that buy junk bonds received $2.67 billion in deposits, according to Lipper.
BlackRock ETF

BlackRock, the world’s biggest money manager, has been among the beneficiaries. Its $16.7 billion iShares iBoxx $ High Yield Corporate Bond fund has recorded the biggest inflows among all fixed-income ETFs purchasing corporate debt this year, Bloomberg data show.

“The market’s been supported by retail fund inflows and stabilization in oil prices,” Matthew Mish, a UBS AG credit strategist in New York, said in a telephone interview. “The ECB’s QE announcement has reinvigorated yield-seeking behavior.”

Sales of speculative-grade securities worldwide have reached $56.7 billion this year, up 4.3 percent from the same period in 2014, according to data compiled by Bloomberg.

Netflix Inc., which is rated four levels below investment grade, boosted a bond offering on Feb. 2 by 50 percent to $1.5 billion as investors snapped up the subscription-streaming service’s largest debt sale ever, Bloomberg data show. Univision Communications Inc. sold $1.25 billion in junk bonds, more than doubling the size of the offer for the Spanish-language broadcaster from an initially planned $600 million.
‘Higher Returns’

Junk-rated borrowers have issued the equivalent of $21.4 billion of bonds in Europe this year, more than double the amount sold by this time in 2014, Bloomberg data show. That’s the busiest start to a year ever.

“The underpinning of risk assets right now is low interest rates,” Gibson Smith, chief investment officer of fixed income at Janus Capital Management, said in a telephone interview. “Investors are moving money into high yield and seeking higher returns.”

Citgo Holding Inc., a unit of Venezuela’s state-owned oil producer which has seen its credit quality suffer because of the fall in oil prices, had to boost the yield on a $1.5 billion, five-year bond sale by more than a percentage point to 12.1 percent, among other incentives to attract buyers on Monday, according to a person with knowledge of the matter, who asked not to be identified because of company policy.
Distressed Levels

Still, energy companies, which were trading at distressed levels as recently as last month, have enjoyed some relief.

The extra yield investors demand to hold risky energy debt in the U.S. rather than government securities has dropped to 8.9 percentage points, Bloomberg data show. That’s down from as high as 10.7 percentage points in January.

“High-yield is a very attractive asset class,” Margie Patel, a money manager for Wells Capital Management in Boston, which manages $351 billion said in a telephone interview. “We’ve seen some stabilization in energy prices, which have brought a lot of the marginal dollars back.”

To contact the reporters on this story: Sridhar Natarajan in New York at; Cordell Eddings in New York at

To contact the editors responsible for this story: Shannon D. Harrington at Faris Khan, Mitchell Martin