Junk Bond Issuers Join Crowd Warning Of Interest Rate Risk On Bonds

Thursday, February 28, 2013 07:11
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Junk Bond Issuers Join Crowd Warning Of Interest Rate Risk On Bonds

Tags: client education | Economic Outlook | markets

Now, even junk bond issuers are warning that prices on the bonds will drop when interest rates rise.

 
They say their job is to properly structure deals for companies that can fulfill the obligations on their debt and perform well. Interest rate risk is out of their hands.

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Underwriting fees for junk bonds are almost three times the fees for higher grade debt.
 
Simultaneously, banks are warning that when the Fed’s bond-buying spree dries up, prices will likely retreat.
 
Banks have underwritten over $89.6 billion worth of debt this year, 36% more than by this point in 2012.
 
Last year was a record one for junk-bond issuance, resulting in $433 billion in sales. Junk mutual funds and ETFs saw inflows of $33 billion, 55% more than in 2011.
 
Investors hungry for income in an historically low interest rate environment drove the push into junk bonds.
 
The risks in junk bonds in a recovering economic environment are less from companies’ inability to pay than in the fact that a three-year cycle in historically low interest rates must at some
point reverse itself.
 
This is no less true of credit-worthy bonds but the hit to principal values will be faster and larger to lesser credits than they will likely be to highly rated bonds.
 
This time, the market is healthier, say analysts. Most new issues are from companies capturing lower interest rates through refinancings.
 
Many analysts are recommending short maturities in anticipation that long-term interest rates will begin to rise before the Fed starts raising rates.
 
The long end of the curve could get out of control and could happen sooner than many expect.

 

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