With Fed's Massive Mortgage-Buying Spree Ending Today, Market Seeks New Drivers
nvestors flooded risky companies with money in March even as the government prepares to shut down a key engine driving one of the greatest corporate-bond rallies in history.
A total $31.5 billion in new high-yield debt, otherwise known as junk bonds, hit the market through Tuesday, exceeding the previous monthly record in November 2006. Partly propelling the activity: The Federal Reserve's massive mortgage-buying program, which comes to an end Wednesday.
By buying $1.25 trillion of mortgage securities, the Fed absorbed a flood of assets that otherwise would have needed buyers. That kept money in the hands of investors, who went searching for something else to buy. The Fed's underpinning encouraged investors to seek riskier, higher-yielding securities. A natural choice: corporate bonds.
The bond boom helped spur a rebound in the stock market and in the broader economy—recoveries that then, in turn, reinforced the bond rally. Investors poured a record $375.4 billion into bond mutual funds in 2009, while pulling out $8.7 billion from stock funds, according to data compiled by the Investment Company Institute.
Also Tuesday, a closely watched index tracking high-yield bond returns reached a record high, capping an 82% run from its December 2008 bottom, according to Bank of America Merrill Lynch indexes. Even returns on normally stodgy investment-grade U.S. debt are up 35% from their October 2008 bottom. By contrast, major stock-market indexes are still below precrisis levels, and their returns have trailed those of bonds.
Among the high-yield issuers in recent weeks have been California mortgage lender Provident Funding as well as Dutch firm LyondellBasell, which issued notes to help U.S. subsidiary Lyondell Chemical emerge from bankruptcy-court protection.
Just 18 months ago, in the depth of the financial crisis—a time when the nation's debt markets were frozen—this kind of activity was all but unimaginable. Lehman Brothers had collapsed and investors sold bonds to meet their short-term cash needs just to survive.Doubts were growing about the survivability of some of the world's most credit-worthy companies.
Today, with the Fed's mortgage-buying program coming to an end, the debate is turning to whether the economy can sustain the rally. The odds are increasing that corporate-bond gains may be limited from here, given the heights already reached, the government's reduced support and the risk of rising interest rates.
http://online.wsj.com/article/SB10001424052702304739104575154251385237696.htmlThat's great. The corporations and big bondholders are raking it in. What about the worker?
