Investors appetite for junk bonds at unprecedented levels

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Despite plenty of talk regarding the possibility of a major sell off in bonds this year, albeit with U.S. Treasury bonds (so far) following this prediction, investor appetite for junk bonds seems to be undiminished.

The average yield on U.S. junk bonds dropped below 6% for the first time ever in recent weeks. Last week they hit a new record low of 5.91%, as agreement on the fiscal cliff gave rise to another excuse for those with a healthy appetite for risk and desire for yield to pile in. Any fear of default seem to be forgotten for now, but with returns at levels seemingly out of kilter with the potential risks, income investors hungry for payouts seems to have blinded many to the dangers.

Junk bonds around the world outperformed investment-grade debt in 2012 by the biggest margin since 2010 as low central bank rates pushed investors to seek riskier, higher-yielding assets.

Sales of junk bonds worldwide soared 35 percent to a record $425 billion in 2012 as the global default rate dropped to 2.7 percent from an average 4.8 percent since 1983. Sales of triple-C rated junk bonds climbed 63 per cent last year and analysts are estimating that junk bond sales could hit $300 billion in 2013.

In 2012, the asset class produced 15.6% in 2012, the average junk bond price now stands at 104.96 cents on the dollar, within striking distance of the record-high 104.99 set in 2004.

European junk bonds outperformed those in the United States, with Bank of America Merrill Lynch’s Euro High-Yield Constrained Index returning 27 percent this year, compared with a gain of 15.6 percent for the firm’s U.S. High-Yield Master II Index.

There is much debate whether 2013 will prove the end of the junk bond bubble, and indeed whether it is a bubble at all. But for now, there appears to be little catalysts for a sharp sell off despite the significant warning signs… One to keep an eye on that’s for sure! 

Contrarian Investor UK

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