Cracks Appear in Red Hot Junk Bond Market
Cracks are appearing in the recently solid market for junk bonds, the high-risk, high-yield securities that have outraced the stock market and most other investments for 18 months.</br></br>"We've had a decent correction here," says Edward D'Alelio, chief investment officer of the high-yield bond group at Putnam Cos., a Boston mutual fund company. Mr. D'Alelio and some other investors suggest that the price declines may be nearly over. But many say that the market, which on Friday continued to be hit by waves of selling by mutual funds, remains fragile.</br></br>The reversal has been sudden. Until recently, the junk bond market "hasn't had a bad month in 18 months," says Richard A. Hocker, a managing director at Penn Capital Management, Cherry Hill, N.J.</br></br>This year is shaping up as the biggest ever for new issues of junk bonds, which are issued by companies with below-investment-grade credit quality. According to Securities Data Co., nearly $32 billion of junk bonds came to market in 1992 through mid-October, as much as was issued in all of 1986.</br></br>Prices of junk bonds initially kept rising, despite the volume of new issues, because most of the new bonds were used to refinance older, higher-cost debt, much as homeowners are refinancing their mortgages. First Boston Corp. calculates that in the first six months of 1992, the actual "net new supply" of junk bonds, after many got redeemed, was only $6.7 billion, far less than the $20 billion in new issues.