US junk bond market shows signs of a recovery

THE US junk bond market is showing signs of life as bond prices edge up and more companies conduct sales.

Still, it might be premature to declare the sector has recovered from its WorldCom-induced abyss.

"I would characterise it as recovering, not recovered," Richard Cryan, who runs the $207million Evergreen Select High-Yield Bond Fund in Boston, said.

"What disturbs some players is war fears in Iraq; more players say it's weak economic numbers; and most players say it's the weak earnings recovery," Mr Cryan said.

This month, TV station operator Gray Television Inc., packaging company Smurfit-Stone Container Corp. and propane seller Ferrell Gas Partners Inc. raised $970million from sales of junk bonds yielding 8.25% to 9.25%, at a time 10-year Treasury yields straddle 4%, just above their 40-year low.

Experts said the sales, the first since August 14, as well as gains in equities since late July, showed investors were more comfortable with risk. Investors added $1.85billion of cash to junk bond mutual funds in the last two weeks, after 11 weeks of outflows, AMG Data Services said.

Yet experts believed a soft economy and corporate profits, and possible US military action in Iraq, might cap gains for junk bonds, even as other bonds' yields bump near record lows.

Kingman Penniman, president of high-yield research firm KDP Investment Advisors Inc. of Montpelier, Vermont, said: "A lot of risk has been priced into high-yield. Investors are putting their toes into the water but they're not swimming yet."

Junk, or high-yield, bonds are rated "Ba1" or lower by Moody's Investors Service and "BB-plus" or lower by Standard & Poor's Ratings Services because of their risks.

Junk bonds have returned negative 6.34% this year, including interest, but are up 3.38% since July 31, according to Merrill Lynch & Co. The average junk bond yields 9.44% age points more than Treasuries, it said.

The bonds wilted and sales stalled this summer as WorldCom Inc. admitted to misreporting expenses and went bankrupt, in a year already tinged by record defaults.

Moody's said that 86 junk bond issuers defaulted on $74billion of bonds between January and June, near the full-year record of $86billion set in 2001. It said the default rate, now 10.1%, should fall to about 8.8% by June.

Moody's chief economist John Lonski said junk bond credit quality was a problem. Mr Lonski said rating downgrades were outpacing upgrades by 2.8-to-1 this quarter the best in two years, but "by no means" enough to improve the bonds' outlook.

Investors still favour safety. New issues since July 31 have carried an average 9.84% yield, below the average 13.12% yield on junk bonds that Merrill Lynch tracks.

"Companies that have sold...are known names," Mr Cryan said.

"They are coming at yields which are good, but not eye-popping. Investors should not expect a name like Smurfit, which is a terrific company, to come at 13% yields," he said.

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