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To: Lucretius who wrote (204928)	11/15/2002 4:42:44 PM
From: Dr. Jeff	Read Replies (1) \| Respond to of 436258

Junk bond investors should be careful - S&P Friday November 15, 3:03 pm ET By Jonathan Stempel Reuters NEW YORK, Nov 15 (Reuters) - U.S. investors are growing more comfortable with junk bonds. A leading arbiter of how junky they are says not so fast. Standard & Poor's, which rates companies on their ability to pay their debts, said the "lackluster" global economy, weak earnings and an unending stream of accounting nightmares will make it hard for companies to improve their credit. That may make it tough for junk bonds, which have lived up to their name by actually losing money since 1997, to rebound. The credit rating agency's report suggests that investors who poured $2.8 billion into junk, or high-yield, bond mutual funds in the last five weeks, according to AMG Data Services, should not count on a steady revival for the risky bonds. "Investors are finding a high-yield allocation attractive right now, but from a credit quality perspective they still need to proceed with caution," said Diane Vazza, S&P's head of global fixed-income research. "There is more bad news ahead." S&P and rival Fitch Ratings rate junk bonds on a "BB-plus" to "D" scale," and Moody's Investors Service on a similar "Ba1" to "C" scale. The bonds have lost 6.47 percent this year but are up 2.77 percent this month, Merrill Lynch & Co. said. They are down about 2 percent since the end of 1997, it said. DOWNGRADES, DEFAULTS TO COME S&P said 42 percent of U.S. junk-rated companies, up from 35 percent a year ago, carry a "negative" outlook, meaning they may be downgraded within two years, or have negative "credit implications," meaning a cut is possible within three months. Some sectors are better than others. Health care has nearly equal numbers of companies with positive and negative outlooks. In contrast, not a single company in the building materials, forest products and telecommunications sectors has a positive outlook. "Clearly, there are more downgrades in store, even after all the downgrades of recent years," said Vazza. It will also lead to more defaults. S&P said the 12-month U.S. junk bond default rate is 8.38 percent, including such blowups as Enron Corp. (Other OTC:ENRNQ.PK - News), Kmart Corp. (NYSE:KM - News) and WorldCom Inc. (Other OTC:WCOEQ.PK - News). Though the rate is down from 9.77 percent at the end of 2001, S&P said it will "remain elevated" and only slowly decline in 2003. Still, bondholders can take heart that dozens of weak companies that sold bonds in the free-money late-1990s won't default in the future -- because they already have. Tony Rodriguez, head of fixed income at US Bancorp Asset Management in Minneapolis, said: "When you look at the composition of the market, balance sheet repair and underlying macroeconomic fundamentals, we think they're all supportive of a better high-yield market over the next 12 to 24 months." ISSUANCE TO REMAIN MUTED Still, a tough economy may keep some companies from taking advantage. Vazza said: "There is no convincing indicator that capital spending is going to rise to spur new issue volume." S&P said U.S. companies have sold $46.2 billion of junk bonds in 2002, half the level of 2001. It said risk aversion will in 2003 keep many low-rated companies out of the market. Many junk bond investors have even moved up the credit spectrum, buying investment-grade bonds such as those from Ford Motor Co.'s (NYSE:F - News) finance arm. Junk bonds yield 13.09 percent, a dramatic 9.71 percentage points more than U.S. Treasury bonds, Merrill Lynch said. Vazza said junk bond investors may consider mutual funds for "professional diversification." Fund service Morningstar Inc.'s "fund analyst picks" include the Eaton Vance Income Fund of Boston A (Nasdaq:EVIBX - News), Janus High-Yield (Nasdaq:JAHYX - News), Northeast Investors (Nasdaq:NTHEX - News) and Pimco High Yield A (Nasdaq:PHDAX - News). (Additional reporting by Dena Aubin.) biz.yahoo.com