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

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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