Bloomberg News

Junk Appeals With Spreads Wider Than Pre-Crisis, McClellan Says

July 26, 2012

Junk-rated corporate bonds are “attractive” with relative yields on the debt still wider than before the financial crisis, according to JPMorgan Private Bank’s Megan McClellan.

Speculative-grade securities yielded 640 basis points, or 6.4 percentage points, more than similar-maturity Treasuries as of yesterday, according to Bank of America Merrill Lynch index data. That compares with 242 basis points, the low in May 2007. Overall yields are little changed at 7.7 percent.

“Credit, even though the absolute yield level is low, is relatively attractive to where it was pre-credit-crisis,” McClellan, U.S. head of fixed income at JPMorgan, said in an interview on Bloomberg Television’s “Market Makers” with Stephanie Ruhle and Scarlet Fu.

The firm favors company bonds rated BB to B that mature in five to six years, McClellan said.

“Our bias tends to be toward the little bit more highly rated companies,” she said. “You don’t want to lend to these companies for 10 years. We have an extraordinary amount of uncertainty.”

U.S. junk bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, have returned 8.2 percent this year, compared with 3.2 percent for Treasuries, Bank of America Merrill Lynch Index data show. The S&P 500 index of stocks has gained 7.7 percent including reinvested dividends through yesterday.

Demographic Shift

While a so-called bubble is typically only apparent in retrospect, demographic changes as more Americans reach retirement age and demand for safer securities by pensions and insurance companies may help underpin fixed-income assets, McClellan said.

“People flock to fixed income and yield in times of uncertainty,” she said. “You’re certainly seeing that reflected in inflows.”

Investor flows into U.S. bond mutual-funds and exchange traded funds surged to $157 billion in the first half of 2012, compared with $65 billion during the same period last year, according Sausalito, California-based TrimTabs Investment Research.

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Stephanie Ruhle in New York at sruhle2@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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