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WSJ: Corporate Bond Market Faces Rocky 2013

Friday, 28 Dec 2012 10:35 AM

Corporate bonds will face bumps along the road in 2013 after a solid 2012, as falling yields may take the appeal out of the investment class, according to The Wall Street Journal’s Richard Barley.

Investment-grade corporate bonds returned 9.6 percent in the United States and 13.3 percent in Europe through Dec. 24, The Journal reported, citing Barclays data, while high-yield bonds, excluding financial companies, returned 15 percent.

With demand solid and prices rising, yields on corporate debt are falling — the average global investment-grade bond yields just 2.6 percent, which leaves fewer options for investors looking for returns.

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"So where should investors look for value? Europe could be a better bet than the U.S. since European firms are unlikely to take risks with their balance sheets while growth remains so weak," Barley wrote.

"In contrast, U.S. companies are increasingly turning to shareholder-friendly gambits such as issuing bonds to fund share buybacks."

External factors will play a key role in the corporate bond market in 2013, as well.

"Economic uncertainty has been a friend to the bond market in recent years. If that fades, then cash could start to depart for higher-risk assets that offer more upside. And rising government yields could erode returns for corporate bonds," Barley said.

"That needn't be a disaster since the damage could be tempered by tightening credit spreads and hedges against rising rates. But it will mean corporate bonds are no longer in the sweet spot they have occupied for the past few years."

Companies worldwide sold $3.93 trillion in debt in 2012, according to data compiled by Bloomberg and the Bank of America Merrill Lynch Global Corporate & High Yield Index.

Many companies are taking advantage of low interest rates and are issuing debt.

The Federal Reserve has slashed benchmark interest rates to near zero has said rates will stay low until the unemployment rate drop to 6.5 percent, well below its current 7.7 percent level.

“Companies are borrowing more for general corporate purposes and they may make an acquisition, they may sit on the cash,” Sabur Moini, who manages about $2.5 billion of high- yield assets at Payden & Rygel in Los Angeles, told Bloomberg.

“Those are the kinds of things that concern” ratings agencies, Moini said, “when companies are just raising cash and it’s sort of unclear what they’re going to do with the cash.”

Editor's Note: The Final Turning Predicted for America. See Proof.

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