More Evidence on the Return of Risk

Thanks to the Fed’s assistance, investors are increasing their appetite for risk:

The riskiest junk bonds are providing a refuge for investors concerned that inflation will accelerate as the Federal Reserve attempts to bolster the economy.

Debt issues from iStar Financial Inc., the commercial real- estate lender, and Atlanta-based credit-card processor First Data Corp. are leading returns of 0.22 percent this month for bonds rated CCC and lower, while higher-ranked BB tier debt is down 0.76 percent, Bank of America Merrill Lynch index data show. Investment-grade debt losses average 1.15 percent.

The lowest-tier notes offer yields of about 11.5 percent, compared with 6.4 percent for BB bonds, providing a buffer in case consumer prices rise at a faster pace as the Fed prints money to buy $600 billion of Treasuries. When inflation accelerated in 2006, returns on the CCC bonds were 18.6 percent, almost double the 9.9 percent gain for BB debt and 4.64 percent for high-grade securities.

“The wider the spread the more cushion you have” against rising consumer prices eating into interest payments, said James Serhant, senior vice president and head of high-yield fixed income at Hartford Investment Management Co. in Hartford, Connecticut, who oversees the $448.6 million Hartford High Yield Fund.

Posted by on November 22nd, 2010 at 2:51 pm


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