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Business Title: Economy Gets Healthier as Company Bond Yields Fall For all the concern about another recession, the outlook for America’s economy is looking brighter in the bond market, where investors are accepting the lowest yields since 2004 to lend companies money. Lenders typically require higher interest rates when the economy cools and default risks rise. Instead, yields over Treasuries on corporate debt have shrunk as much as 0.38 percentage point on average to 2.9 percentage points from the high this year in June, according to Bank of America Merrill Lynch index data. Debt sales totaled $90.1 billion last month, the busiest July on record, Bloomberg data show. While the government said July 30 that gross domestic product slowed to a 2.4 percent annual pace last quarter from 3.7 percent in the prior period, Prudential Investment Management Inc., Loomis Sayles & Co. and Invesco Ltd., which oversee $1.42 trillion, say they see strength. The Commerce Department data also showed business investment climbed at the fastest rate since 1997 as corporate profits rose. “The market seems to feel that the probability of a double dip has declined significantly,” said Michael Collins, senior investment officer at Newark, New Jersey-based Prudential, which has about $693 billion of assets under management. “Investors are looking at these earnings and assuming that eventually the strong position that corporations are in from an earnings and cash flow and liquidity standpoint are going to propel the economy further.” Rising Earnings More than 77 percent of the Standard & Poor’s 500 Index companies that reported second-quarter profits exceeded the average analyst estimate since July 12, data compiled by Bloomberg show. Earnings will rise 35 percent this year, the most since 1988, forecasts show. Following the 2001 recession, income growth never exceeded 20 percent. The global default rate tumbled to 6.1 percent in June from about 12.1 percent a year earlier, and will slide to 2.4 percent by year-end, according to Moody’s Investors Service. Investors drove U.S. company bond yields down to an average of 4.98 percent last week, the lowest since March 2004, from this year’s high of 5.75 percent on Jan. 4, according to Bank of America Merrill Lynch’s U.S. Corporate & High Yield index. The rally pushed returns on junk bonds above those of Treasuries last month for the first time since April. High- yield, high-risk debt gained 3.46 percent, the most since 5.98 percent in September. Treasuries earned 0.68 percent. ‘Very Attractive’ “Corporate credit in particular looks very attractive,” Kathleen Gaffney, co-manager of the flagship Loomis Sayles Bond Fund, said on Bloomberg Television’s “Street Smart” with Carol Massar and Matt Miller. The $19 billion fund has beaten 95 percent of its peers over the past five years. Even though two-year Treasury yields fell to a record low 0.5460 percent today, a Federal Reserve Bank of Cleveland report July 1 suggests there’s a 12 percent change of another recession in the next year. That’s because 10-year yields are 2.36 percentage points higher, more than double the 20-year average and about the same as in 2003, just before GDP rose 3.6 percent. The two-year yield rose 2 basis points to 0.56 percent as of 10:04 a.m. in New York. “While we’re not saying double dip, growth is going to be slow and low, which is painful,” said Gaffney of Boston-based Loomis Sayles. “Treasuries might be attractive as a safe haven, but when I think about the near-term prospects with very meager yields, lack of return, and then going forward at some point you do get to more solid traction in the economy.” Corporate Spending Consumer spending, which accounts for about 70 percent of the economy, rose at a 1.6 percent pace last quarter, down from a 1.9 percent rate in the previous three months that was smaller than previously estimated. The GDP report said corporate spending on equipment and software jumped at a 22 percent annual rate last quarter. The increase was the biggest since 1997 and signals confidence among company executives. The Institute for Supply Management-Chicago Inc. said July 30 that its barometer of business activity for the month rose to 62.3 from 59.1 in June, exceeding the median forecast of 56 by economists in a Bloomberg News survey. Figures greater than 50 signal expansion. “While there’s a concern on the economy, we still have many customers asking us, are you ready for peak? Are you ready to handle volume?” Jim Young, the chief executive officer of Union Pacific Corp., said on conference call with analysts and investors July 22 after the Omaha, Nebraska-based railroad company posted a 53 percent increase in second-quarter profit. “I’m looking forward to continued growth here.” Job Losses Though corporate bond yield premiums have narrowed from 3.25 percentage points in June, they are still above the low this year of 2.37 percentage points in April. The government may say this week the economy lost 60,000 jobs in July, and the unemployment rate rose to 9.6 percent from 9.5 percent in June, according to the median estimate of 61 economists surveyed by Bloomberg. Average increases of 100,000 private sector jobs a month this year have been “insufficient to reduce the unemployment rate materially,” Fed Chairman Ben S. Bernanke said before the Senate Banking Committee July 21. A double-dip recession “is in the cards,” David Tice, manager of the Federated Prudent Bear Fund said on Bloomberg Television’s “Street Smart” program with Matt Miller on July 30. Without increased inventories and government spending, economic growth would have been flat last quarter, he said. Growth Forecasts The economy is likely to expand 3.1 percent in 2010 and 2.9 percent in 2011, according to the median of 55 estimates in a survey by Bloomberg this month. Even though investors “ratcheted down” expectations for growth, the yield gap to Treasuries “got a little too wide,” said Peter Ehret, a senior money manager who helps invest $580 billion at Invesco in Houston. Corporations have built up cash to protect themselves from a downturn. S&P 500 companies are sitting on a record $1.24 trillion, Bloomberg data show. Moody’s expects the global speculative-grade default rate to decline to 2.4 percent by the end of the year and 1.8 percent by the second quarter of 2011, the New York-based ratings firm said July 8 in a statement. “Defaults in high yield should be really minor for at least the rest of this year and perhaps going well into next year,” Ehret said. “If we have renewed recession, things get worse for us. That’s an important pivot point. We don’t really see renewed recession at this point.” Bond Sales Investors added $5.37 billion to global bond funds for the week ending July 21, bringing this year’s total to $122.8 billion, according to EPFR Global, the Cambridge, Massachusetts- based research firm. High-yield funds had $948 million of inflows the week to July 21 and $1.12 billion the prior period. Junk-rated borrowers sold $16.7 billion of debt last month, more than twice that of June, according to data compiled by Bloomberg. High-yield debt is ranked below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s. InVentiv Health Inc. sold $275 million of 10 percent, eight-year notes on July 28 and borrowed $525 million from a term loan on July 27. Proceeds will finance the $1.1 billion buyout of the Somerset, New Jersey-based company by Thomas H. Lee Partners LP. The notes, rated Caa1 by Moody’s, near the lowest tier of junk, rose 2 cents to a mid-price of 102 cents on the dollar in secondary trading the next day, according to New York-based brokerage firm RW Pressprich & Co. Similarly-rated borrowers issued $2.2 billion of debt last month, more than May and June combined, Bloomberg data show. The securities returned 3.7 percent in July, and 8.9 percent for the year, according to Bank of America Merrill Lynch index data. “The fact that these guys can access the market at reasonable yields further postpones the next default cycle,” Prudential’s Collins said.
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#1. To: Brian S (#0)
LMAO.
LMAO. Note ANY talk of paying down debt is not even uttered. The mere mention of which sends ALL markets into a nose dive. See Antal Fekete for details. Watch gold go into backwardation and then disappear.
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