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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Crimson Ghost who wrote (8558)	2/24/2004 3:39:07 PM
From: russwinter	Read Replies (2) \| Respond to of 110194

Reuters US junk bond rally flounders on supply glut Tuesday February 24, 3:17 pm ET By Dena Aubin NEW YORK, Feb 24 (Reuters) - Junk bonds, after a promising January rally, are falling back to earth, putting financing in jeopardy for some cash-hungry U.S. companies. Power producer Calpine Corp. (NYSE:CPN - News), the latest casualty of this turn in the market, pulled a $1 billion junk bond sale on Tuesday after it faced stiff resistance from investors cautious about buying more low-rated debt. The $1 billion junk bond sale was one component of a $2.3 billion loan and note offering crucial to the company's refinancing plan. The entire offering was canceled. "Investors are a little more discerning," said Sean Slein, high-yield portfolio manager for Dwight Asset Management, who does not own Calpine debt. "The liquidity we saw in the first part of January is largely gone, so you don't have money chasing deals." Junk, or high-yield, bonds are still up for the year, but gains are shrinking as investor demand cools and as issuers flood the market with new bond sales, including a spate of poorly rated or unattractively structured deals. One of the biggest barriers to further gains is that junk bonds are viewed as overpriced after huge gains in 2003, one strategist said. "It's not that the underlying picture is deteriorating -- quite the opposite," said Anton Pil, global head of fixed-income at JP Morgan Private Bank. "Risk assets in general have priced in a lot of good news and are reaching valuations where people are lot more picky about where they want to put money." MUTUAL FUNDS LOSE CASH Prices on the average junk bond have soared to about 104 cents on the dollar from 78 cents when the market began rallying in October 2002, according to Merrill Lynch. That has driven yields down to 7.4 percent from 14.2 percent over the same period. "The thought of a bubble may be overstating it, because even the most pessimistic predictions show growth for the economy," said Kamalesh Rao, economist for Moody's Investors Service (News - Websites) . Still, junk bond yields relative to Treasuries may have fallen further than credit fundamentals justify, he said. Mutual funds, big buyers of the riskier bonds, have lost cash this year after seeing a record $27 billion inflow in 2003, according to AMG Data Services. Investors yanked nearly $2.4 billion out of junk bond mutual funds in February, reversing January's $2 billion inflow, amid investor worries that the rally was overdone. There is still a healthy appetite for high-quality junk bonds, investors said. The market has already digested more than $18 billion in new supply this year, a 61 percent increase over the same period last year, according to Thomson Financial. RISKIEST BONDS RUN AGROUND Many bond pros believe that a growing economy and a declining default rate should help junk bonds hold their value this year and post gains in the high single-digits, although nobody expects them to match last year's 28 percent returns. The market got off to a sizzling start this year, returning 2.8 percent through January 23, including interest and price gains, according to Merrill Lynch. However, it has gone downhill since, with returns shrinking to 1.2 percent. The riskiest bonds, the place to be at the height of last year's rally, are now the market's worst performers. After soaring by 61 percent last year, bonds with deeply speculative "CCC" ratings have posted a 3 percent loss over the past month, Merrill Lynch reported. Bonds with the highest junk bond rating of "BB" are down just 0.4 percent. As the shelved Calpine sale shows, big borrowers with low ratings can no longer take market access for granted. "It behooves them to be careful when they're coming into the market, listen to their bankers and be flexible," said Dwight Asset Management's Slein. "The market is not going to become punitive, but the market's always rational."