Bloomberg News

BlackRock Seeks Junk as Spreads Drop Most of ’11: Credit Markets

October 17, 2011

Oct. 17 (Bloomberg) -- Investors from Deutsche Bank AG to BlackRock Inc. are accelerating purchases of speculative-grade bonds as relative yields decline at the fastest pace this year.

Yields are within 8.10 percentage points on average of Treasuries, down 1.22 percentage points from a two-year high of 9.32 on Oct. 4, according to the Bank of America Merrill Lynch Global High Yield Index. Spreads have shrunk 0.55 percentage point this month, the most since December. October returns total 1.7 percent, led by Las Vegas-based Caesars Entertainment Corp. and First Data Corp., the credit-card processor owned by KKR & Co., and follow losses of 7.9 percent over August and September.

Bondholders are gaining confidence that the global economy may avoid a recession, wagering that European leaders will prevent their debt crisis from infecting banks. U.S. mutual funds that invest in high-yield, high-risk securities reported inflows of $550 million last week, while the cost of protecting the debt from default fell the most in almost two years.

“The probabilities of default have been overly priced by the market,” Kevin Lecocq, the head of global investment solutions at the private wealth management unit of Deutsche Bank, Germany’s largest lender. “We’re moving up into more high-yield fixed income, and away from the very highest-rated corporates,” Lecocq said Oct. 13 in a Bloomberg Television interview.

Improved ‘Tone’

BlackRock, the world’s biggest money manager, is buying speculative-grade bonds as the chance of a severe U.S. economic slowdown wanes, said Rick Rieder, chief investment officer of fundamental fixed income at the firm in New York.

“There’s a tone that’s changed,” Rieder, who oversees more than $612 billion, said in a Bloomberg Television interview. “The economic data over the past few days, over the past couple of weeks, have suggested that we’re not going into or it doesn’t look like we’re going into a significant recession.”

Elsewhere in credit markets, a benchmark gauge of U.S. corporate credit risk rose from the lowest level in more than three weeks. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 2.9 basis points to a mid-price of 132.9 basis points as of 11:38 a.m. in New York, according to Markit Group Ltd.

The index, which typically rises as investor confidence deteriorates and falls as it improves, climbed from the lowest level since Sept. 20 after Steffen Seibert, German Chancellor Angela Merkel’s chief spokesman, said at a news briefing that European Union leaders won’t provide the quick ending to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.

Kinder Morgan Loan

The credit gauge declined from a more than two-year high of 150.1 basis points on Oct. 3 as investor optimism grew that the region’s fiscal imbalances are being contained.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Barclays Plc, the world’s top adviser on oil and gas mergers during the past two years, is lending $11.5 billion to junk-rated Kinder Morgan Inc. to help maintain that lead.

The financing commitment will provide Kinder Morgan with the cash needed for a $21.1 billion purchase of El Paso Corp., the largest pipeline takeover in history, Kinder Morgan said in a statement yesterday. Barclays’s role on the deal also pushes the London-based bank up to sixth place from eighth among merger and acquisition advisers across all industries worldwide.

Deploy Cash

If European leaders come up with a temporary solution to the sovereign-debt crisis, or credit markets becomes less volatile, fund managers will deploy their cash, according to Christopher Sheldon, co-head of leveraged credit at KKR Asset Management in San Francisco. The investment-management arm of the private-equity firm manages $14 billion.

In the U.S., retail sales rose in September by the most in seven months, showing American consumers are helping the world’s largest economy fend off a slump. Purchases grew 1.1 percent, exceeding the median forecast of economists surveyed by Bloomberg News, according to Commerce Department data released Oct. 14 in Washington.

The trailing twelve-month global speculative-grade default rate will fall to 1.4 percent by year-end before rising to 2.1 percent by the end of the third quarter of 2012, Moody’s said in an Oct. 6 report. A year ago, the default rate was 4 percent. The rate declined to 1.8 percent in this year’s third quarter, from 2.3 percent in the prior period, the ratings firm said.

‘Attractive Time’

Corporate bonds and loans set to mature through 2014 have tumbled 66 percent to $413 billion from $1.2 trillion at the end of 2008, according to JPMorgan research. The figure has been lowered from $473 billion as of May 31, JPMorgan data show.

“It’s an attractive time to invest in the high-yield market, both loans and bonds,” said Russell Morrison, who helps oversee $22 billion of speculative-grade bonds and loans as head of high-yield investments at Babson Capital Management LLC in Charlotte, North Carolina. “We are expecting defaults to rise at some point next year. However, the rise is likely to be moderate and well below levels that we saw at the peak.”

Inflows into U.S. high-yield funds added to a “trajectory that has been largely positive since September,” according to an Oct. 13 Bank of America Merrill Lynch report. “A significant portion” of the funds can be attributed to exchange-traded funds, New York-based analysts Neha Khoda and Oleg Melentyev wrote.

Caesars, First Data

The Markit CDX North America High Yield Index, which rises as investor confidence improves, has added 5.8 percentage points since Oct. 3 to 91.25 percent of face value, according to Markit. That’s the biggest monthly gain since December 2009.

Bonds from Caesars, the world’s largest casino operator, gained 9.9 percent this month after losing 16.1 percent in September, Bank of America Merrill Lynch index data show. The company’s $3.31 billion of 10 percent notes due in December 2018 have risen 10.25 cents this month to 69.5 cents on the dollar and a yield of 17.7 percent, Trace data show.

Debt from Atlanta-based First Data, which was acquired by KKR for $27.5 billion in 2007, has risen 11.6 percent in October following a decline of 12.6 percent last month, the index data show. Its $2.41 billion of 11.25 percent bonds due March 2016 have increased by 9.75 cents this month to 77.25 cents on the dollar, for a yield of 19.1 percent, Trace data show.

While high-yield bonds have gained 4.1 percent since Oct. 4, investment-grade notes have lost 0.5 percent, Bank of America Merrill Lynch index data show.

“You could paint a scenario where the market rebounds really quickly right now, both trading levels and new issue volumes,” KKR Asset’s Sheldon said. “Many are sitting on high cash balances, keeping dry powder due to the heightened concerns in Europe.”

--With assistance from Abigail Moses and Maryam Nemazee in London, Erik Schatzker and John Parry in New York and Shelley Smith in Hong Kong. Editors: Alan Goldstein, Faris Khan

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net.

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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