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The Junk Bond Rally

The quest for yield has opened the floodgates for junk bond issuers. Companies that are considered to be of questionable credit quality have been issuing debt in record amounts so far this year. And they have been able to do that because investors looking for higher returns are buying their bonds faster than they can issue them.

Investors have been pouring money into junk bond funds (junk bonds are debt issued by companies rated less than Baa3 by Moody’s and BBB- by S&P). And when I say investors are pouring money into junk, they are really torrentially dumping money in. Junk bond funds have seen 14 consecutive weeks of inflows; last week investors added $957 million. Just a few weeks ago, junk bond funds saw 6 straight weeks of inflows over $1 billion. And with that pace, inflows so far this year have almost surpassed inflows for all of 2011.

Companies are selling bonds at a record pace this year to try to keep up with the strength of investor demand. In the first two months of 2012, $62 billion in junk-rated debt was sold in the US market…that’s around 30% more than the same time last year (and February’s issuance was the third highest on record).

The action isn’t too surprising. Investors are searching for yield, and they are not finding it in Treasuries or in investment grade corporate bonds. In an environment of pervasively low rates, bond investors have to seek out a return somewhere.

And it’s not too surprising that iShares reported that its $14.2 billion junk bond ETF is its fastest growing fixed income product. iShares iBoxx High Yield Corporate Bond (HYG) is a long-term uptrend, and is a long-term buy. The fund sports a yield of 6.4%, and is up 1.4% so far this year.


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