The Wall Street Journal-20080116-Hefty Junk-Bond Yields Still Lacking
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Hefty Junk-Bond Yields Still Lacking
Amid all the post-holiday sales that dot the January landscape, some of the best bargains around right now appear to be in the so-called junk-bond market.
At mid-month, risk premiums on speculative-grade bonds have ballooned to 6.66 percentage points over Treasury bonds according to the Merrill Lynch Master II High Yield Index. That's up from 5.92 percentage points at the end of last month and an all-time low of 2.41 percentage points last June.
With junk bonds offering investors that much yield, at a time when Treasury yields are languishing -- the 10-year note rose 25/32 for a yield of 3.701% -- one might think junk bonds would be flying off the shelves.
Instead, shoppers are browsing, remarking on the good values that abound -- and not buying.
"Things are cheap, but the problem is that tomorrow they'll be cheaper," said Sabur Moini, high-yield fund manager at Payden & Rygel in Los Angeles. "Why buy it now when it will be on sale in a couple of days?"
Risk premiums in this market for low-rated bonds have steadily widened in a continuing response to the credit crisis that began last year. Much of that represented a much-needed correction, as investors went from being exceptionally complacent about risk to demanding a greater premium to buy speculative-grade securities in a wobbly market.
At this point, yields on junk bonds have zoomed past their historical average of 5.08 percentage points over Treasurys, according to Merrill Lynch. Given their trajectory over the past couple of weeks, they show few signs of stopping.
There is a strong argument that the price of risk in this market has overshot its mark. Bond spreads -- which widen when prices fall -- expand when buyers demand better returns for the risk that some of their holdings may default. But the default rate is still at historic lows.
Indeed, the gap between December's 0.9% default rate and the average risk premiums on junk bonds seen early this month represents a record, according to Moody's economist John Lonski. He said current spreads anticipate a surge in the default rate and mean that junk bonds now offer more than adequate default risk compensation.
Several investors agreed that pervasive negative sentiment regarding credit markets is largely to blame for keeping buyers away at current prices.
"One main reason is just general uncertainty and fear," said Joe Patire, managing director at YieldQuest Securities in Atlanta.
AUCTION RESULTS
Here are the results of the Treasury auction of four-week bills. All bids
are awarded at a single price at the market-clearing yield. Rates are
determined by the difference between that price and the face value.
Applications ..................................... $35,357,333,000
Accepted bids .................................... $9,000,058,000
Accepted noncompetitively ........................ $342,133,000
Foreign Noncompetitively ......................... $0
Auction price (Rate) ............................. 99.760444 (3.080%)
Coupon equivalent ................................ 3.139%
Bids at market-clearing yld accepted ............. 13.85%
Cusip number ..................................... 912795C74
The bills are dated Jan. 17, 2008, and mature Feb. 14, 2008. Harrah's to Set Tone
Bankers underwriting the debt for the Harrah's Entertainment Inc.'s leveraged buyout will begin marketing $3 billion of the $7.25 billion term loan at a discount of 96.5 cents on the dollar, attendees of the bank meeting in New York said.
The offering is one of the first major LBO deals to come to market since credit conditions for highly levered offers deteriorated in the second half of 2007. The success of the Harrah's offering is expected to set the tone for the $230 billion in LBO debt still on banks' books.
Harrah's, a casino operator, is being bought out by Apollo Management LP and TPG in a deal that will require roughly $20 billion of debt financing.
The $7.25 billion term loan is split into three parts, a $2.25 billion part that's callable at par, the $3 billion portion with stricter call protection, meaning the company will have to pay a premium to buy back the debt, and a $2 billion portion that isn't callable for three years. The offering is led by Banc of America Securities and Deutsche Bank.
-- Cynthia Koons
