Interest Rate Roundup

Tuesday, March 25, 2008

Got junk? If so, you're hurting

Everyone's focus over the past several months has been the meltdown in the mortgage debt market. But this credit crisis is much broader. I've talked about how everything from commercial mortgage bonds to municipals have gotten hammered amid a broad flight from risk. And this morning, Bloomberg shines the spotlight on the dismal performance of junk bonds. Have a look ...

"High-yield, high-risk bonds are off to their worst start ever, and the biggest investors say there's no recovery in sight.

"Junk bonds have fallen an average 3.9 percent this year, losing about $35 billion, according to data from Merrill Lynch & Co. indexes. Some funds managed by John Hancock Advisers LLC, Oppenheimer Funds Inc. and Fidelity Investments are down more than 7 percent, showing that even the largest investors were caught off guard by the collapse.

"While the Federal Reserve has slashed benchmark interest rates by 3 percentage points since September, it has been unable to get investors to increase their purchases of the riskiest assets. The declines are choking off financing for speculative- grade companies, boosting defaults. The debt is likely to "struggle'' for months as the economy enters a recession, according to JPMorgan Securities Inc., the top high-yield research firm in Institutional Investor magazine's annual poll.

"The moves have been absolutely vicious,'' said Arthur Calavritinos, whose $1.2 billion John Hancock High Yield Fund has lost about 9.8 percent since December. The Boston-based manager said it's the worst market since he started in finance in 1985.

"Just 11 companies have issued $9 billion of junk bonds in the U.S. in 2008, according to data compiled by Bloomberg. This time last year, 83 had sold $39.5 billion. Junk bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- by Standard & Poor's."


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