Junk Bonds Earn Nickname in August
NEW YORK (AP) _ Bond defaults, recession fears and explosives piling up near some of the world’s largest pools of oil helped junk bonds earn their nickname last month.
August was one of the worst months on record for the risky bonds, according to indexes compiled by analysts who watch the market.
Salomon Brothers Inc.‘s High-Yield Market Index had a total negative return of 3.87 percent in August, and Merrill Lynch & Co.’s high-yield index posted a total negative return of 3.83 percent.
″The stars were aligned just right last month,″ said Joseph C. Bencivenga, director of high-yield research at Salomon.
High-yield bond issuers were defaulting at an annual rate of 5.8 percent in the first half of the year, the highest in 20 years, according to Moody’s Investors Service Inc. Also, many economists believe the economy is headed for a recession or already in one, which could accelerate defaults.
Threat of war in the Middle East and higher oil prices has pushed down bond and stock markets since Iraq invaded Kuwait Aug. 2. Investors fear higher inflation that could result from the sharp increase in oil prices.
If there’s any good news in the junk-bond market’s poor performance, it’s that the market performed as expected in light of world events, said Martin Fridson, head of high-yield research at Merrill Lynch.
″In a general way, it should mirror the trends in other markets,″ he said.
The 30-issue Dow Jones industrial average, for example, fell 10 percent in the month and the broader Standard & Poors 500 Index was off 9 percent in August, its worst month since October 1987.
As a result of the slumping junk market, new issues have slowed to a trickle.
″Given the lackluster tone in the market today, the investors have taken a wait-and-see attitude,″ Bencivenga said.
Last week, Stone Container Corp., a Chicago-based paper and packaging company, canceled plans to peddle $200 million worth of new junk bonds on a tour around the country. Arnold Brookstone, chief financial officer at Stone Container, said the issue was postponed until the market improves.
The derth of investors willing to put their money into the junk market has forced issuers to offer higher yields. For some, the yields are apparently too burdensome to warrant selling the notes.
The shortage of new issues has also spilled over into the more secure investment-grade market. Bondweek, a trade publication, last week reported that three frequent debt issuers with strong credit ratings wanted to sell three-year notes at around 9 percent in the last week in August.
Investment bankers, however, warned them away from the market, the newsletter said, quoting unidentified syndicate and corporate officials.
Without any major developments in the Middle East, the next bit of news that could have a profound impact on the junk-bond market is the Commerce Deparment’s release this Friday of retail sales figures.
″It should be flat. If it comes in above or below that, (the price of) high-yields could jump up dramatically or see further deterioration,″ Bencivenga said.