Salient to Investors:
Junk-bonds are outperforming the highest speculative-grade tier by the most since February, and yield the lowest ever.
EPFR reports inflows into junk-bond funds globally at $52.4 billion for 2012 through Aug. 29, versus $8.3 billion in 2011 and $31.5 billion in 2010, and despite slowing earnings growth for speculative-grade companies accelerating credit-ratings cuts.
James Lee at Calvert Investment Management said shorts have pulled back from the market.
Borrowing shares of SPDR Barclays Capital High Yield Bond ETF is commonly used for short sales.
Corporate ratings downgrades outpace upgrades for the first time since 2009.
Peter Troob at Troob Capital Management says high yield is an oxymoron as there is nothing high about it – recommends avoiding junk bonds.
In August, Oleg Melentyev et al at Bank of America said flows into credit funds are reaching bubble levels, never before breached in history. The strategists said corporate issuers are seeing noticeably slower revenue growth and an inability to immediately cut the costs to fully protect margins.
Moody’s global speculative-grade default rate was 3 percent in August versus 1.8 percent a year ago.
Diane Vazza at S&P said we are past the peak of credit quality, but that’s not to say we’re in a rapid deterioration mode. S&P has downgraded 220 speculative-grade U.S. companies in 2012, 44 more than upgrades, and the first year since 2009 that downgrades have outpaced upgrades.