High-yield “junk” bonds are having a decent year so far as lower interest rates have kept investors looking for more creative ways to generate income
Also, the credit market’s junk yard is buzzing with activity. French cable operator Numericable Group recently priced an $11 billion junk bond offering, the largest on record, to help fund parent company Altice SA’s acquisition of French telecoms company SFR .
The placement comes amid a stampede by junk bond issuers looking to lock in financing before the ultra-low interest rates around the globe start to rise in 2015 as expected. An uptick in merger activity and a bigger risk appetite by investors hungry for yields are also powering demand for these higher-risk securities.
The Wall Street Journal reported that worldwide $157 billion of junk bonds has been issued since January, citing data by compiled by Dealogic.
According to Robert Smith at Reuters, European high-yield bond funds have seen almost $13 billion of retail inflows since the beginning of the year, citing Bank of America Merrill Lynch data. The wall of cash coincides with the return of large scale M&A and IPO activity in Europe.
All that said, junk bond investors aren’t seeing spectacular returns just yet. Barron’s notes long-dated, investment-grade corporate bonds are outperforming junk bonds this year, with total returns already of 7.48% vs. junk at 3.3%. In 2013, high-yield returned 7.42% while investment grade issues actually lost ground, down 1.57%.
Another way to play the recovery in the global M&A arena are bank loan funds, which have decent yields but are structured as floating-rate securities with durations near zero, so they provide some protection against rising rates. Like high-yield bonds, bank loans are issued by companies with credit ratings below investment grade.
These funds typically buy speculative-grade loans used to finance buyouts. Since their rates are usually variable and the underlying debt is sometimes short in duration, the loans can be less vulnerable to increases in interest rates. And they usually offer better yields than high-quality bonds.
John Gerard Lewis, who oversees the Stable High Yield Portfolio on the Covestor platform, thinks bank loan funds can play a productive role in a balanced and diversified investment plan.
Lewis has exposure to bank loans in Stable High Yield Portfolio with a position in PowerShares Senior Loan Portfolio ETF (BKLN). The fund has a yield of about 4% as of April 24.
Are you looking for yield in this low-rate market? Check out our free eGuide: Generating Income in 2014.
DISCLAIMER: The investments discussed are held in client accounts as of March 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. All investments involve risk, the amount of which may vary significantly. Past performance is no guarantee of future results.
