Junk Spreads Steady As Treasurys Underperform

The high yield market continued to suffer losses last week, both in terms of cash outflows from mutual funds and in negative returns, sources said.

The funds lost another $342 million for the week ending June 2, the latest available from AMG Data Services. The loss of cash, the fourth consecutive weekly outflow, brought the grand total to $1.4 billion over the past four weeks.

That has hampered not only the secondary market but the new issues market as well, as investors simply hold onto their current portfolios and wait for a better landscape, reluctant to buy anything, according to market sources. In fact, that has been one difference between the current market and other downturns, when the new issues may have dried up but buy-siders could turn to the secondary to put money to work. This time, investors said, they simply don't have the money to put to work.

As far as the high yield returns are concerned, the market turned in a negative 0.17% month-to-date through June 9, according to preliminary numbers in the Bear Stearns high yield index. And that was after May, which posted a negative 1.78% and was probably the worst month since October, according to investors.

The yields in the junk market were at 10.78% as of last Wednesday, but spreads were fairly flat because the Treasury market performed poorly with yields pushing over 6% in the first time in more than a year. Prices on the long bond fell 13/32 to 89.25 last Wednesday, the day it closed with a yield over 6%. One reason investors are skittish on fixed-income is the threat that the Federal Reserve may raise interest rates in its meetings later this month, sources said.

High yield spreads were at about 500 to 510 basis points over comparable Treasurys. In the middle of October, spreads were at 750 basis points over Treasurys, and then they tightened to 487 basis points over the curve in early May, according to the Bear Stearns index.

Through June 9, the underperforming sectors in the high yield market included utilities and satellites. And the long-term maturities, as well as the BB-rated issues, also underperformed.