(Bloomberg News) Morgan Stanley, JPMorgan Chase & Co. and Bank of America Corp. are recommending junk bonds as Europe's sovereign-debt crisis flares and concern mounts over the strength of the U.S. recovery.
Morgan Stanley said last week that U.S. high-yield obligations were in a "sweet spot" as borrowers cut their debt loads. JPMorgan said junk yields will fall more than half a percentage point by year-end. Bank of America favors debentures rated in the middle tier of speculative grade.
Gains on U.S. high-yield, high-risk bonds, which are little changed since the end of February, are set to accelerate as central banks respond more aggressively to contain Europe's fiscal imbalances, Morgan Stanley and JPMorgan said. While forecasting the default rate will rise this year, Moody's Investors Service says the figure will stay below historic averages.
"High yield is still providing attractive spread compensation, even adjusting for defaults relative to higher- quality credit," Adam Richmond, a high-yield credit strategist at New York-based Morgan Stanley, said in a telephone interview. "Certainly there are growing concerns surrounding Europe. We believe it's a somewhat different situation this year in part given more responsive central banks globally."
While the extra yield investors demand to hold U.S. junk bonds rather than government debt has declined 103 basis points this year to 620 basis points, spreads are still up from last year's low of 452 on Feb. 21, 2011, Bank of America Merrill Lynch index data show. Spreads soared to 910 basis points on Oct. 4, a two-year high, on concern the European crisis would drag the global economy into recession.
'Market Is Sound'
"Fundamentally the high-yield market is sound, with credit metrics fine and defaults very low," Peter Acciavatti, head of U.S. high yield at JPMorgan, wrote in a report last week.
Elsewhere in credit markets, Credit Suisse Group AG, Citigroup Inc. and Goldman Sachs Group Inc. are teaming up to bid on $7.49 billion of commercial-real estate securities the Federal Reserve Bank of New York took on in the 2008 credit crisis. JPMorgan is seeking to raise a $512.6 million collateralized loan obligation for Carlyle Group LP. Bonds of Petroleos de Venezuela SA were the most actively traded yesterday in the U.S. amid speculation that President Hugo Chavez's health is faltering.
Rate Swap Spreads
The U.S. two-year interest-rate swap spread, a measure of debt market stress, climbed 1.04 basis points to 31.17 basis points, the highest level since April 10. The gauge, which has expanded from a more than seven-month low of 23.5 on March 28, widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.
The cost of protecting corporate bonds from default in the U.S. rose. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, increased 1.2 basis points to a mid-price of 101 basis points in New York, according to prices compiled by Bloomberg. That's the highest level in a week for the index, which has risen from a one-year low of 85.46 on March 19.