The Wall Street Journal | Yield-Hungry Buyers Plumb Bond Market’s Depths

By December 16, 2010In The News

Investors hungry for yield are being advised to start feeding along the very bottom of the credit ratings scale and buy high-interest triple-C-rated bonds, the bottom tier of speculative-grade corporate debt.

After a two-year rally has shaved yields on investment-grade bonds—and even on higher-rated speculative-grade debt—to their lowest point in generations, analysts at J.P. Morgan and Bank of America Merrill Lynch this week advised clients to focus on the lowest-rated bonds heading into 2011. They contend the extra yield is worth the risk because the default rate is forecast to fall to 2% in 2011.

“We believe a portfolio tiered toward lower-rated/higher-yielding issuers will likely outperform,” the analysts wrote, based on expectations of accelerating economic growth, a rising stock market and “negligible” risk that corporate default rates will grow in 2011.

J.P. Morgan analysts recommend making room for more triple-C-rated bonds by shifting out of the highest speculative-grade tier, double-B-rated, and by matching indexes on middle-tier B-rated credits.

Bank of America Merrill Lynch offered a nearly identical recommendation in its 2011 outlook published Tuesday.

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