October 26, 2003	Sunday	Sha’aban 29, 1424

NEW YORK, Oct 25: Falling defaults and a recharged economy helped US junk bonds extend a potent rally in October, pushing yields to their lowest levels since the birth of the modern junk bond market in the early 1980s.

Yields on KDP Investment Advisors’ index of high-yield bonds dipped below 8 per cent this month for the first time since KDP began tracking them in 1992 and stood at 7.95 per cent on Thursday.

Separate data compiled by Moody’s Investors Service showed yields at 8.3 per cent this week, a record low, the rating agency said.

Since the market itself took its modern form in the 1980s with Michael Milken, these are definitely the lowest, said Moody’s chief economist John Lonski.

The falling yields are a bonanza to low-rated companies such as Fisher Scientific International Inc, a New Hampshire-based laboratory equipment maker. It added $150 million to an issue of 10-year notes this week, paying just 6.75 per cent in yield, down from 8 per cent it paid as recently as August. Proceeds will be used to refinance older debt.

We were very pleased with our yield, said company spokeswoman Gia Oei. It positions us well in the event of future increases in interest rates and gives us additional balance sheet flexibility.

In some strong-performing sectors, such as media and entertainment companies, yields have dipped as low as 5 per cent on average, according to KDP. To put that in perspective, risk-free Treasuries were yielding 5 per cent as recently as June 2002.

The market has been somewhat on a tear again the first half of this month, said KDP’s president, Kingman Penniman. It’s amazing how many industries are trading at 5, 6 or 7 per cent yields.

Junk-rated companies are benefiting from an easing of monetary policy by the Federal Reserve. As the Fed holds its federal funds rate at a 45-year low of 1 per cent, money market yields have fallen to just one-half of 1 per cent, nudging investors into riskier assets in search of yield.

With the Fed going to great lengths to indicate that it has no intention of tightening monetary policy into the foreseeable future, apparently investors feel more comfortable about assuming credit risks, said Moody’s Lonski.

Investors have pumped a record $23 billion into junk bond mutual funds this year, according to AMG Data Services, while pension funds and endowments also are allocating large sums to the junk bond market. Large, defined-benefit pension funds had about $32 billion, or 7 per cent of their fixed-income assets, invested in junk bonds last year, according to Greenwich Associates.

Robust investor demand has helped junk bonds post total returns of 34 per cent over the past 12 months, their second-best 12-month performance ever, according to Merrill Lynch. The record was 41 per cent for the 12 months ending January 2002.

Investor cash is pouring into the market at a time when issuance of new bonds is relatively modest. Although companies sold $100 billion of junk bonds through September this year, about three-quarters of the proceeds went to refinance outstanding debt, according to Bear Stearns.

Apart from refinancing, companies’ need for funds remains low, said Margaret Patel, portfolio manager of the Pioneer High-Yield Fund.

The recovery is still young, and I think we’ll need to see maybe another six months of economic growth before we see companies wanting to borrow to expand their businesses, she said.—Reuters