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WSJ: Investors Bet Big on Junk-Bonds, Rally Continues

WSJ: Investors Bet Big on Junk-Bonds, Rally Continues

(Dollar Photo Club)

By    |   Monday, 09 January 2017 09:44 AM

Savvy investors are hoping that improved earnings by risky companies and a slower pace of defaults will fuel a junk-bond rally for a little longer.

After six straight quarters of year-over-year declines, earnings of low-rated companies increased 14 percent in the second quarter and 72 percent in the third quarter, according to Bank of America Merrill Lynch. Meanwhile, defaults have slowed after an early surge energy-industry bankruptcies.

“Because of those factors, some investors and analysts say junk bonds— issued by companies that are often small and burdened by debt—could do much better than might be expected after such a strong year,” The Wall Street Journal reported.

Junk bonds are commonly defined as a high-yield bond that is rated below investment grade. These bonds have a higher risk of default, but typically pay higher yields than better quality bonds in order to make them attractive to investors.

“From my vantage point, fundamentals are the most important thing” and “they’ve modestly improved,” said Michael Contopoulos, head of high-yield strategy at Bank of America, noting stronger earnings and steady oil prices have reduced risks.

“The average junk bond yield was 5.86% Thursday, a two-year low but above the sub-5% levels it reached in 2014. Despite the low yields, many investors still view junk bonds as attractive at a time when the 10-year Treasury note yield is below 2.5% and stock valuations are widely seen as inflated,” WSJ.com reported.

The Bloomberg Barclays U.S. Corporate High Yield Index returned 17.1% in 2016. That was its best total return since 2009 and better than those produced by all three major stock indexes, as well as investment-grade corporate bonds and U.S. Treasurys.

To be sure, inflows into junk-bond exchange-traded funds surged last month, outpacing investment-grade for the first time in 2016, Bloomberg reported. The flip occurred as the Federal Reserve voted to raise interest rates, threatening the value of the underlying debt.

Investors’ sudden fondness for high-yield securities likely stems from the market’s increased tolerance for risk since the election of Donald Trump, said Eric Balchunas, an ETF analyst for Bloomberg Intelligence. “There’s a new variable in town and it’s massive.”

(Newsmax wire services contributed to this report).

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Savvy investors are hoping that improved earnings by risky companies and a slower pace of defaults will fuel a junk-bond rally for a little longer.
junk, bond, rally, investors
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2017-44-09
Monday, 09 January 2017 09:44 AM
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