NU Online News Service, July 18, 2003, 1:46 p.m. EDT – Investment-grade corporate bonds may now be somewhat more attractive than low-rated corporate bonds, according to an investment outlook released by Prudential Fixed Income, a unit of Prudential Financial Inc., Newark, N.J.
Corporate bonds are important to life insurers because they make up a large share of the insurers’ investment holdings.
Prudential Fixed Income analysts are “mildly positive” about investment-grade bonds and “modestly positive” with a “mixed outlook” about low-rated bonds.
The spreads between what healthy companies pay on investment-grade bonds and what the federal government pays on virtually risk-free government bonds are shrinking. But the spreads are still wider than they have been in recent years, the Prudential analysts write.
“Economic fundamentals and the interest rate environment would suggest further spread tightening,” the analysts predict.
The analysts note that some of the struggling companies that have issued low-rated, high-yield bonds are still having trouble making their payments.
But, in many cases, in the high-yield market, “companies have successfully cut costs and stabilized earnings and operating cash flow,” the analysts write.
Companies are also having an easier time getting the capital they need to refinance their debt, and that has led to a sharp drop in the default rate for high-yield bonds, the analysts report.