Junk-Bond Managers Venture Into Unrated Debt

Source: The Wall Street Journal

Record-low interest rates on riskier corporate bonds are pushing money managers to look further ahead in an effort to boost returns. DXY up +0.16%, EUR USD down -0.12%.

• Once reserved for the safest types of government bonds, some managers of speculative-grade bond funds are piling into debt with record-low credit ratings.
• No available strategy is likely to satisfy fully because of the recent low-rate climate.
• The average speculative-grade U.S. corporate bond yield dropped to a historic low of 3.53% this summer.
• The average extra yield that investors demand to hold low-rated bonds rather than ultrasafe Treasury is near a record low.
• Low yields impose challenges to all fixed-income investors, including those purchasing higher-quality, investment-grade bonds.
• Low yields will cause more anxiety for high-yield fund managers, considering that purchasing the wrong bonds can indicate dealing with defaults and drawn-out bankruptcies.
• The managers have been piling into the lowest-rated speculative-grade bonds, those rated triple-C or lower.
• Investors could obtain 2.79 percentage points of extra spread by buying triple-C bonds rather than those rated one tier higher.