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After getting whacked on concerns over Greece, junk bonds are moving higher again.
The market for risky corporate bonds has looked like a hostage to headlines in recent months. Whether it's China tightening bank lending, the White House talking about new financial regulations or the prospect of Greece defaulting on its debt, the news flow is handing high-yield bond buyers another reason for worry, and jittery investors make volatile markets.
"The problem with high-yield is that we're very sensitive to headline event risk," says Kingman Penniman, president of KDP Investment Advisors, a debt research firm. From late January through February, he says, the tendency to fear the worst and seek safety--a bout of what's called "risk aversion"--returned after months of near euphoria.
The high-yield market, which returned 57.5% last year, slipped into negative territory in the second week of February, according to a Bank of America Merrill Lynch index. With the fear of a Greek default waning, the market has recovered and is now up 2.56% on the year (including coupon payments).
At an average yield of 8.9%, the average junk bond pays a 6.49 percentage point spread over similar U.S. Treasury notes. Data from the rating agency Standard & Poor's show that's below the five-year average of 6.17 percentage points.
That gap between yields on high-yield and relatively safe Treasury bonds implies that investors have a strong appetite for risk. In the financial crisis, for instance, the yield gap opened to 18 percentage points. But that reading of risk doesn't tell you how quickly a mood can swing. As Greece's problems captured the public's attention last month, investors pulled nearly $1 billion from high-yield bond funds for two weeks straight, according to Lipper's AMG Data Services.
Undeterred, banks kept the spigots open, Penniman says, pushing more high-yield paper into the market. When prices on those newly issued bonds sank in trading, sales quickly dried up.
"That speed bump was good for the market," Penniman says. Banks brought new notes from Oshkosh ( OSK - news - people ), ArvinMeritor ( ARM - news - people ) and others to the market last Friday, most of which have since traded higher. Buyers and sellers seem to have regained their balance, he says. And that, in turn, has helped Bank of America ( BAC - news - people ) sell notes for Pioneer Drilling ( PDC - news - people )., the retailer Express and the hospital chain HCA this week.
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