High yield bonds, typically known as junk bonds are now coming back to the fund managers’ lists. QE from Europe, lift oil price and a strong belief from US Fed on the strong economy are convincing the fund managers to take the risk to invest in junk bonds for more money.
More than $10 billion of high-yield debt is on track to be sold this week in the U.S., which would make for the busiest five consecutive days since November, according to data compiled by Bloomberg. In Europe with yields on a growing number of companies’ bonds falling below zero and the price of oil showing signs of recovering, fund managers are increasingly willing to buy speculative-grade securities.
Numericable-SFR SA, the French phone business, on Wednesday sold $5.19 billion of securities, the biggest single junk bond worldwide this year. Charter Communications Inc., the cable operator that has sold $22 billion in more than five different offerings over the last year, raised $1.2 billion the next day. Peugeot SA is marketing 500 million euros ($570 million) of junk bonds.
Junk bonds in the U.S. are also benefiting from $1.2 billion of inflows into high-yield funds this week following outflows of $544.6 million last week, according to data provider Lipper.
Carmaker Peugeot is offering seven-year bonds yielding 2.375 percent, according to a person familiar with the matter, who asked not to be identified because they aren’t authorized to reveal the information.
Not every issuer has had an easy time raising money in the junk bond market. Western Digital Corp. was forced last month to reduce its two-part high-yield sale backing its takeover of SanDisk Corp. to $5.23 billion after investors balked at its original $5.6 billion size. The company also had to boost yields on the deal to attract buyers. The biggest part of that deal was a $3.35 billion note.
While more than $64 billion of junk bonds have been sold in the U.S. and Europe this year, issuance is a far cry away from the $127.3 billion issued in both regions at this point in 2015, Bloomberg data show.
Junk bonds continue to face various headwinds such as the possibility of a U.K. exit from Europe and volatility in oil prices, said Ben Emons, a money manager at Leader Capital Corp. in Los Angeles.
Moody’s Investors Service projects that the default rate on U.S. speculative-grade debt will climb to 5.34 percent by the end of February 2017, up from 3.63 percent this year. The rate could reach as high as 17.3 percent in a more pessimistic forecast. And Barclays Plc slashed its 2016 projection for junk bond sales to at least $190 billion on April 1, down from a November estimate of as much as $290 billion.
But that doesn’t mean there isn’t an opening for performing companies to step in, said Keith Bachman, head of the U.S. high-yield business at Aberdeen Asset Management Inc.
Numericable, the French telecom company, boosted a 10-year secured bond deal twice, more than doubling it to $5.19 billion from an initial target of $2.25 billion. The company also managed to tighten the yield on the securities to 7.375 percent from an initial offer of 7.5 percent. Proceeds will be used to repay a revolving credit facility and redeem a portion of dollar bonds maturing in May 2019.
Charter Communications raised $1.2 billion of notes to refinance debt, the cable-operator’s second foray in the bond market in two months, Bloomberg data show. The company boosted the deal from an initial target of $1 billion.