DJ Fed's Rate Cut Lends Optimism To Junk Bond Market
18 Apr 14:40
By John Dooley and Tom Barkley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Wednesday's surprise interest rate cut by the Federal
Reserve pushed most junk bond prices higher and improved the outlook for
speculative grade borrowers.
Benchmark bonds gapped up by about two point on a price basis immediately
following the move and investors started to strategize about the possibility of
an economic recovery and easier access to capital for companies with low credit
ratings.
"Near term, there has been a positive psychological impact and high-yield has
moved up with the stock market," said Jerry Paul, portfolio manager at Invesco
Funds.
"Long term, today's move is positive because it indicates that the Fed is
alert to what's going on in the economy and keeping the economy strong, which
is good for high-yield," he said.
An improved economic outlook, strong technical demand from inflows into
high-yield mutual funds earlier this year, a positively shaped Treasury yield
curve and strong equity prices all bode well for high-yield bonds, according to
investors and strategists.
"The Fed's move brings rates down in absolute terms, so it should stimulate
issuance," said Martin Fridson, high-yield bond strategist at Merrill Lynch.
"The demand is there. Investors have funds to put to work," he said.
Analysts predicted that the rate cut would drive new issuance but to a lesser
extent than in January, when the Fed's first rate cut spurred massive borrowing
by cable and wireless telecom companies.
"The difference is that this market hasn't been dead for four to six months,
and all of the good creditworthy issuers have been out in the market," said
Richard Byrne, global head of high-yield at Deutsche Bank Securities.
"For the guys that are too small or in the wrong sector, the wrong story, the
wrong leverage, it will be interesting to see if this cut is enough to
whitewash all that. I doubt it," he said.
The Phone Is Dead
Noticeably absent from Wednesday's rally were bonds issued by most long
distance and competitive local exchange carriers. Those bonds have been weighed
down recently by concerns about bankruptcies and a shakeout in the
telecommunications industry.
Bonds issued by wireline companies like Nextlink Communications LLC (X.NEX),
Level 3 Communications Inc. (LVLT) and Williams Communications Group (WCG) were
unchanged to slightly lower in what one investor said was a sign of the high
yield market's disappointment in the sector.
"If you mainline them oxygen and they don't rally, it's proof positive that
it's a dead sector," said Prescott Crocker, portfolio manager at Evergreen High
Yield.
Wireless telecom companies fared better, and bonds issued by benchmark issuer
Nextel Communications Inc. (NXTL) were quoted two to three points higher on the
day.
Strategists said the biggest impact of the rate cut could be felt by
traditional high-yield borrowers in the manufacturing, energy or chemical
industries - if it makes it easier for companies in those sectors to borrow.
"To the extent that this rate cut alleviates refinancing concerns for the 80%
of the market that isn't telecom, it's a good thing and those sectors could be
poised for a rally," said Walter McGuire, high-yield bond strategist at
Deutsche Bank.
-By John Dooley and Tom Barkley, Dow Jones Newswires;
201 938-2078 and 201 938-4385,
john.dooley@dowjones.com and tom.barkley@dowjones.com
(END) DOW JONES NEWS 04-18-01
02:40 PM |
