HY Market Looks Ahead To Recovery


More investors dipped their toes into the high yield market last week, but market observers say that a full economic recovery is still at least months away.

Investors looked to the high yield market with the idea of taking on risk while the equity market and Treasurys are not pulling their weight on yield. "Right now it's about the trade-off between the specter of increasing default rates versus the abundant liquidity in the market and the very low rates on Treasurys that have people thinking about taking on more risk," said a Midwest-based portfolio manager. "That's being supported by the liquidity being provided by the federal government stimulus. We're seeing the liquidity premium as a major theme over the next couple of months."

The Merrill Lynch High Yield Master II Index made a big jump to kickoff trading last week, surging more than 12 points in a single day, to 456.709 Tuesday from a 444.345 close on Monday. The index was at 461.443 prior to Thursday's opening.

Yield on the 10-year Treasury note made a small jump to start the week, but it remained at a very low point. After closing just below 2.50% Monday, the yield began Tuesday's trading by jumping to 2.60%. The yield on the 10-year note was at 2.46% by midday Thursday.

Appleton Papers was the biggest loser on the secondary market, according to Advantage Data. The Appleton, Wis.-based carbonless paper manufacturer sputtered in the wake of earnings that came in below projections. Last month, Standard & Poor's placed all of the company's ratings on CreditWatch with negative implications. Paper and wood pulp producers have been hard hit on the equity and debt markets, as their businesses have suffered in the wake of lower newsprint and construction lumber demands. Appleton's 9.75% notes due 2014 dropped 39 points to reach 19.125 by Thursday's opening.

Russia cut off delivery of natural gas from its pipeline that supplies much of Europe, due to a dispute with Ukraine. In addition to leaving parts of Eastern Europe without heat, the maneuver added pressure to financial institutions from both countries.

Russia-based bank IIB, also known as International Industrial Bank, took significant losses in secondary trading. The bank is seeking loans from other financial institutions and said in late December that it would seek to buy back several tranches of its bonds. By Thursday's opening, IIB's 9.5% bonds due 2009 lost 30.625 points to trade at 29.

Ukrainian bank Standard Bank, formerly known as Privatbank, also saw secondary market losses in the wake of the gas pipeline standoff. Standard Bank's 8.75% notes due 2016 slid 25 points by Thursday to 24.875.

Canadian Imperial Bank of Commerce, better known as CIBC, lost ground in trading as well. The bank took losses in the failed BCE buyout and is facing significantly lower underwriting revenues due to the downturn in the buyout market. The Canadian economy is also projected to experience little to no growth this year, according to economists. CIBC's 3.3125% bonds due 2085 lost 24.5 points to reach 36.625 by Thursday.

A diverse mix of companies was represented in the top gainers list last week. Bonds from Ranhill Labuan, a subsidiary of Malaysian water and power company Ranhill, gained the most. The company announced it would delay its departure from the stock exchange amid reports that one of its largest shareholders was planning to take it private. The company denied it had received any proposals to go private. Ranhill's 12.5% notes due 2011 gained 51.875 points to trade at 88.5, the highest priced bond among the top 20 gainers last week.

GMAC's mortgage unit Residential Capital's bonds were buoyed by the massive $6 billion bailout package being sent the way of GMAC and parent company GM. GMAC also stated it would continue to support ResCap and said it had made significant progress in restructuring the group. ResCap has taken massive losses on risky loans. ResCap's floating-rate notes due 2009 gained 34 points by Thursday's opening to trade at 70.125.

Stone Energy made gains after announcing its capital budget for this year. The Lafayette, La.-based oil and natural gas E&P company said its capital budget would total $300 million, with $170 million of that projected to be used for exploration projects in the Gulf of Mexico. By early Thursday, Stone's 8.25% bonds due 2011 jumped 16.25 points to 77.875.

Casino operator MGM Mirage also made the top gainers list. Las Vegas-based casinos had a better holiday season than some had projected, according to a KeyBanc analyst. Last week MGM launched a Web site to hire 12,000 workers for a new Las Vegas casino it plans to open. MGM Mirage's 8.375% notes due 2011 climbed 15.125 points to 73.375 by Thursday's opening.

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