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Wednesday May 04, 09:12
Investors' caution drives high-yield premiums higher
(by Julia Jenson)

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Investors' caution drives high-yield premiums higher Decline in the high-yield bond market transferred to the leveraged loan market led to a drastic increase in divergence between first and second lien loans. The risk premium on high-yield bonds over government debt added 18% as Merrill Lynch Master high-yield index jumped 416 basis points above the same level. In the meantime, the investing public has withdrawn over $7bn from the US high-yield bond market in 2005. It is not yet clear whether this bearish trend will continue.

Second liens that give their holder priority in claims to the company’s assets before bondholders have also declined in value to the degree that matched the decline in junk bond prices. This led to an increase in risk premiums to compensate investors for the risk in the environment of rising risk aversion.

“With the siren song of wider high-yield bond spreads luring hot money out of the loan market, second lien spreads have risen significantly in recent weeks,” said Steven Miller at the leveraged commentary and data group of Standard & Poor’s.
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