BUSINESS SEPTEMBER 19, 2010.
Bond Markets Get Riskier
Demand for High-Yield Junk Bonds Boosts Prices
By CARRICK MOLLENKAMP and MARK GONGLOFF
Bond markets are growing riskier as investors seeking steady returns bid up prices and ignore some early warning signs similar to those that flashed during the credit bubble.
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Last week, prices on high-yield, or junk, bonds hit their highest level since 2007, nearly double their lows of the credit crisis. Nine months into the year, companies have sold $172 billion in junk bonds, already an annual record, according to data provider Dealogic.
To some extent, the bull case for junk bonds is based on a declining rate of corporate defaults lately and a belief that, as long as the economy doesn’t relapse into recession, default rates will continue to decline. The financial crisis purged many weak borrowers from the system, and corporate balance sheets are generally stronger today than before the crisis. However, a double-dip recession could hurt another, albeit smaller, wave of borrowers.
The U.S. high-yield default rate fell to 5.1% in August from 13.2% a year ago, Moody’s Investors Service reported recently, adding it expected the rate to fall to less than 3% by the end of the year.