Junk bond fever building as high grade trails

Investors are pumping money into junk bonds globally at the fastest pace ever while tempering their enthusiasm for higher-rated debt, demonstrating a preference for yield over stability.

Speculative-grade bond funds received a record $5.4 billion of deposits in the week ended July 24 while investors yanked $1.8 billion from investment grade, according to data from market researcher EPFR Global. Bond buyers are accepting the lowest yields in more than two years on riskier dollar- denominated debt relative to more creditworthy notes, Bank of America Merrill Lynch index data show.

Investors who abandoned junk bonds at a record pace in June are now casting aside concern that the securities will lose their allure as the Federal Reserve slows its record stimulus because of the extra yield the securities offer. The demand is allowing the neediest borrowers to ramp up indebtedness.

“High yield is far less vulnerable to a rise in interest rates than investment grade,” Gregory Kamford, a credit strategist at RBS Securities Inc. in Stamford, Connecticut, said in a telephone interview. The securities will “materially outperform investment grade over the balance of 2013,” he said.

Corporate bonds globally of all ratings lost 2.4% in June, the biggest decline since October 2008, after Fed Chairman Ben S. Bernanke said May 22 that sustainable labor-market progress could prompt policy makers to scale back $85 billion of monthly purchase of Treasuries and mortgage bonds.

Junk Rally

Intelsat SA, the world’s biggest satellite services company, has led gains this month of 1.82% on junk bonds worldwide, the most in a year, after Bernanke said on July 17 that the U.S. central bank plans to “maintain a high degree of monetary accommodation.” Investment-grade notes have returned 0.9%.

The gap between yields on dollar-denominated high-yield and investment-grade bonds contracted to 3.18 percentage points on July 23 from 4.6 percentage points a year earlier as demand for the riskier debt surged, Bank of America Merrill Lynch index data show.

Investors poured $1.1 billion into exchange-traded funds that focus on dollar-denominated junk bonds in the five weeks ended July 17, compared with $173.8 million of withdrawals from investment-grade bond ETFs, according to data compiled by RBS.

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