Riskier junk bonds are providing a haven for investors

Riskier junk bonds are providing a haven for investors concerned that inflation will accelerate as the Fed tries to bolster the economy.

debt problems of iStar Financial Inc., the commercial real estate lender, and Atlanta-based credit card processor First Data Corp. are taking profit of 0.22 percent this month for bonds rated CCC and lower while higher-ranked debt to BB level is 0.76 percent, Bank of America Merrill Lynch index data show. Investment grade debt losses averaged 1.15 percent.

Lower notes offer income level of about 11.5 percent, compared with 6.4 percent for BB bonds, providing a buffer in case of consumer prices rise at a rate faster than the Federal Reserve prints money to buy 600 billion U.S. dollars of Treasury bonds. When inflation accelerated in 2006, returns on bonds of CCC were 18.6 percent, nearly double the 9.9 percent gain debt BB and 4.64 percent for high-grade securities.

"The wider the spread of the pad has more" against rising consumer prices eat into the interest payments, said James Serhant, senior vice president and head of high yield bonds at Hartford Investment Management Co. Hartford, Connecticut, which oversees the $ 448.6 million from Hartford High Yield Fund.

Holding Value

The emission of lower-rated debt is accelerating, with bonus offers $ 8000000000 CCC or lower in November, after 9.7 billion U.S. dollars in October, the highest since the credit crisis began in 2007, according to sales JPMorgan Chase & Co. this year of $ 45,800,000,000 of debt are only surpassed by the record 52 billion U.S. dollars issued in 2007, JPMorgan analysts led by Peter Acciavatti in New York, wrote in a report dated 19 November.

The concern that inflation may accelerate also arise in the market for mortgage bonds backed by the government, leading buyers to seek full value of loans with higher rates of Barclays Capital index data show.

Elsewhere in credit markets, yields on corporate bonds fell worldwide last week, the investment to increase the previous period. The cost of protecting the company's debt default in U.S. and Europe fell. borrowing costs declined after rising for three consecutive weeks. In emerging markets expanded by a second week.

The debt yields of U.S. company Europe and Asia fell 2 basis points compared with government bonds last week to 165 basis points, or 1.65 percentage points, according to Bank of America Merrill Lynch Global Broad Market Corporate Index. The spreads are up 1 basis point this month. Yields rose last week to an average of 3.67 percent from 3.58 percent.

Decline Default Swaps

Swaps credit-default in the Markit CDX North America Investment Grade Index, which investors use to cover losses on corporate debt or to speculate on creditworthiness, fell 4.3 basis points last week to 89.33 points core, according to Markit Group Ltd. It is the lowest level since Nov. 8.

In London, the Markit iTraxx Europe index of 125 investment grade companies was reduced from 3 to 100.5, the biggest decline since the week ended Oct. 8, when the benchmark fell 7 basis points. The Markit iTraxx index of Asia of 50 investment-grade borrowers outside Japan fell 3 basis points to 104 last week, according to CMA data provider. The index was trading at 102, 8:18 am in Singapore, prices of Credit Agricole CIB show.

The rates tend to fall as improving investor confidence and rising as it deteriorates. Swaps pay the buyer face value if a borrower defaults on its obligations, less the value of the defaulted debt. A basis point equals $ 1,000 annually on a contract protecting $ 10 million of debt.

New Zealand

New Zealand risk bonds rose more than six months after its review of Standard & Poor's outlook on the credit rating of the sovereign foreign currency from stable to negative.

Swaps credit-default in the South Pacific nation rose 8 basis points to 62.5 basis points from 16:23 in Wellington, says the National Australia Bank Ltd. prices. That's the biggest increase since May 21 and the highest since Aug. 31 supplier prices CMA data show.

"The main risk to the rating would be a significant weakening of the credit quality of New Zealand's banking sector," said S & P said in a statement. Nation rating of AA, the second highest grade is the same level as that of Hong Kong.

Global sales of corporate bonds fell 38 percent last week to 74.5 billion. Wind Telecomunicazioni SpA, the Italian mobile phone company, whose father is the merger with VimpelCom Ltd., sold 3.69 billion U.S. dollars of the dollar and euro banknotes on the largest offering of high yield, risky debt in Europe by year.

Leveraged loans

The S & P / LSTA U.S. Leveraged Loan 100 Index fell 0.38 cent to 92.01 cents, the lowest since 05 November. Prices in the index, which measures the 100 largest dollar loans first lien leveraged, have fallen 92.72 cents on Nov. 9, the highest since May 3.

In emerging markets, the relative yields rose 6 basis points to 244 basis points, according to JP Morgan index. Spreads have widened two basis points since late October.

The less creditworthy borrowers are attracting investors hungry for yield, as Fed chairman, Ben S. Bernanke seeks to reduce unemployment, to 9.6 percent last month, and avoid deflation by keeping interest rates at historic lows. The U.S. central bank has kept its benchmark rate in a range from zero to 0.25 percent since December 2008, after the worst financial credit crisis since the Great Depression.

Consumer prices

The consumer price index rose 0.2 percent in October after increasing 0.1 percent the previous month, the Labor Department said on Nov. 17 in Washington. Excluding food and fuel, called basic expenses increased 0.6 percent from October 2009, the smallest increase in registration.

Fed officials are not looking for inflation higher than the level of "2 percent or slightly less" than most politicians to be consistent with the legislative mandate of the bank, he said in Frankfurt on 19 November. Inflation has declined since the last recession began in December 2007, and "deflation could hinder recovery," he said.

Bonds that pay 10 percent hold their value better than those who paid 6 percent, said James Lee, a bond analyst at Calvert Asset Management in Bethesda, Maryland.

"The question is, 'Are you getting enough compensation for the risk CCC?'" Said Lee. "The answer is" probably. "They're probably fully valued."

iStar, First Data

Bond New York-based iStar have returned 6 percent this month, while First Data's debt, purchased by KKR & Co. three years ago, has gained 5.23 percent, according to U.S. Performance of Bank of America Merrill Lynch High, rated CCC and below index.

The return of 1.2 percent of Plano, Texas-based JC Penney Co., the U.S. company third largest department store, led the Bank of America Merrill Lynch U.S. High Yield, BB rated index.

The lowest score index gained 3.54 percent in October, compared with 2.04 percent for bonds CCC BB following returns of 3.8 percent in September compared to 2.74 percent.

High performance, high-risk debt is rated below Baa3 by Moody's Investors Service and lower than BBB-by S & P.

The concern that the reduction in coupon mortgage securities backed by the government will remain outstanding for longer than increase borrowing costs is one of "the most likely culprits" responsible for a jump in the volatility of this market, analysts at Citigroup Inc. Brad Henis and Inger Daniels in New York wrote in a Nov. 19 report.

Rollover Risk

Higher rates reduce the funding from the underlying mortgages, the creation of the called in the life of the bonds that means holders must wait longer to get your principal back as new investments offer higher returns. Low-coupon debt is now more sensitive to the dynamics and the refinancing and the failure of borrowers with higher rate loans will be less affected by higher costs of the new mortgage.

Agency mortgage bonds to 3.5 percent of the coupons, with an estimated duration of 18 November of 4.73 years, a similar Treasury underperformed by 21 basis points this month through that date, data show Barclays. Securities with coupons of 5.5 percent and the duration of 2.97 years exceeded by 65 basis points. Duration is a measure of sensitivity to stock prices to bring about change.

The lowest-rated corporate borrowers is used primarily offers bonds to refinance debt, according to the report of JP Morgan. This year's 46 billion U.S. dollars for the issuance of the CCC, 69 percent were for refinancing, compared with 9 percent of 52 billion U.S. dollars sold in 2007.

Default values have declined as companies have access to cheaper debt. The 12-month default rate on U.S. flight speculative-grade corporate bonds fell by 11 consecutive month in October, to 3.37 percent from 3.96 percent in September, the S & P analyst Diane Vazza wrote in a report of 19 November.

The lowest-rated bonds usually have a shorter duration. CCC and lower rated notes have an average duration of 3.35 years, compared with 4.89 years for BB notes, Bank of America Merrill Lynch, the data show.

"You are exposed to price risk more as interest rates go up" to longer-term debt, said Edward Mally, director of fixed income research at Imperial Capital LLC.