FED CHAIRMAN QUESTIONS VALUE OF JUNK BONDS.Byline: Malcolm Foster Bloomberg News Federal Reserve Chairman Alan Greenspan Alan Greenspan Dr. Greenspan is Chairman of the Board of Governors of the Federal Reserve System. Dr. Greenspan also serves as Chairman of the Federal Open Market Committee (FOMC), the Fed's principal monetary policymaking body. suggested Wednesday that junk bonds junk bond, a bond that involves greater than usual risk as an investment and pays a relatively high rate of interest, typically issued by a company lacking an established earnings history or having a questionable credit history. , not just stocks, could be overvalued Overvalued A stock whose current price is not justified by the earnings outlook or price/earnings (P/E) ratio and thus, expected to drop in price. Overvaluation may result from an emotional buying spurt, which inflates the market price of the stock or from a deterioration in a . The gap in yield between junk bonds, usually considered the riskiest of fixed-income investments, and Treasury securities could be too narrow, Greenspan told Congress. ``Considerable optimism about the ability of businesses to sustain this current healthy financial condition, seems . . . to be influencing the setting of risk premiums, not just in the stock market but throughout the financial system,'' Greenspan said during a semi-annual address on the economy. ``This optimistic op·ti·mist n. 1. One who usually expects a favorable outcome. 2. A believer in philosophical optimism. op attitude has become especially evident in quality spreads on high-yield corporate bonds,'' he added. The difference in yield between 10-year ``B''-rated bonds and comparable Treasury notes has narrowed nearly 1 percentage point over the last three months to 2.4 percentage points. Slightly higher-quality 10-year junks bonds rated ``BB'' have narrowed to 1.1 percentage points above Treasuries. Bonds are considered below investment grade, or junk, if they carry ratings below ``Baa3'' by Moody's Investors Service Moody's Investors Service A leading global credit rating, research and risk analysis firm. Moody's Investors Service A leading firm engaged in credit rating, risk analysis, and research of fixed-income securities and their issuers. and ``BBB-'' by Standard & Poor's Corp. That yield gap has steadily narrowed over the last several years, thanks to steady economic growth, low interest rates and growing demand from investors. Like stocks, junk bonds thrive on positive economic news because it often boosts corporate earnings prospects and lowers the chance of default or bankruptcy. Since their 1990 plunge, junk bonds have gained so much that they are now the star performers in the bond market. Last year, high-yield bonds returned an average 9.8 percent, beating all other types of bonds, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Merrill Lynch Merrill Lynch & Co., Inc. (NYSE: MER TYO: 8675 ), through its subsidiaries and affiliates, provides capital markets services, investment banking and advisory services, wealth management, asset management, insurance, banking and related products and services on a global basis. & Co. Those returns have drawn investors in droves. For the week through last Wednesday, investors plowed $243.885 million into junk-bond funds, the 18th consecutive week of inflows. |
|
||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion