By Aline van Duyn in New YorkPublished: September 28 2010 20:26 | Last updated: September 28 2010 20:26
Retail investors in the US have sharply increased their direct buying of junk bonds in the third quarter of the year, providing evidence of a trend of “yield chasing” that is worrying regulators.
Finra, which regulates US securities firms, said the trend was a concern given the risks involved in this part of the corporate bond market.
For retail trades, defined by Finra as transactions of $100,000 or less, this “buy-sell trade ratio” jumped to over 1.2 in the third quarter, more than double the level it was at in the second quarter.
In contrast, the high-yield “buy-sell trade ratio” for institutional investors fell in the third quarter to close to zero, indicating a more “neutral” stance towards junk bonds by professional investors than their retail counterparts, Finra said.
Steve Joachim, executive vice president at Finra, said the strong buying by retail investors was a “concerning trend” because of the impact on these investors’ investment portfolios “when the market does turn”.
“Investors are doing some yield chasing,” Mr Joachim said. He added that Finra had already reminded bond dealers of their duties to warn investors of risks.
This included alerting investors to factors which might affect the value of corporate bonds, such as changes in credit ratings.
Mr Joachim, speaking lastweek at a Bond Dealers of America conference in Dallas, said the daily trading volumes by retail investors had also risen sharply.
He said the average number of daily high-yield bond trades had more than doubled since the beginning of 2009 to over 4,000 per day. Average daily retail trades of investment grade corporate bonds had fallen in that period from over 18,000 per day to 12,000.
Record low official interest rates and plunging yields on US government bonds has led to a sharp increase in investor demand for corporate bonds. Investors have put a record amount of money into funds investing in corporate bonds and companies have sold record amounts of new debt to tap into this.
The poor performance of equity markets in the last decade has fuelled this trend as investors seek a regular stream of income and assets that are more likely to retain their value.
Even though the yields paid on high yield bonds are close to historic lows, the average yield pick-up paid by companies relative to US Treasury debt remains higher than before the credit crisis.
Finra, which regulates US securities firms, said the trend was a concern given the risks involved in this part of the corporate bond market.
Corporate bond trading activity analysed by Finra shows that the ratio of buying relative to selling of junk bonds by retail investors has jumped in the last quarter. Junk bonds, also called high-yield bonds, are sold by companies with ratings below investment grade, a category which has a higher risk of default.
For retail trades, defined by Finra as transactions of $100,000 or less, this “buy-sell trade ratio” jumped to over 1.2 in the third quarter, more than double the level it was at in the second quarter.
In contrast, the high-yield “buy-sell trade ratio” for institutional investors fell in the third quarter to close to zero, indicating a more “neutral” stance towards junk bonds by professional investors than their retail counterparts, Finra said.
Steve Joachim, executive vice president at Finra, said the strong buying by retail investors was a “concerning trend” because of the impact on these investors’ investment portfolios “when the market does turn”.
“Investors are doing some yield chasing,” Mr Joachim said. He added that Finra had already reminded bond dealers of their duties to warn investors of risks.
This included alerting investors to factors which might affect the value of corporate bonds, such as changes in credit ratings.
Mr Joachim, speaking lastweek at a Bond Dealers of America conference in Dallas, said the daily trading volumes by retail investors had also risen sharply.
He said the average number of daily high-yield bond trades had more than doubled since the beginning of 2009 to over 4,000 per day. Average daily retail trades of investment grade corporate bonds had fallen in that period from over 18,000 per day to 12,000.
Record low official interest rates and plunging yields on US government bonds has led to a sharp increase in investor demand for corporate bonds. Investors have put a record amount of money into funds investing in corporate bonds and companies have sold record amounts of new debt to tap into this.
The poor performance of equity markets in the last decade has fuelled this trend as investors seek a regular stream of income and assets that are more likely to retain their value.
Even though the yields paid on high yield bonds are close to historic lows, the average yield pick-up paid by companies relative to US Treasury debt remains higher than before the credit crisis.
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