The credit crunch is so 2009.
With three weeks left to go in 2010, sales of new high-yield debt are so far above the old record that there's no good adjective to describe the situation. Shattered seems a little too weak. This is like Ben Johnson blowing away the record for the 100 meter dash, or Barry Bonds destroying the home run record. Perhaps those are bad examples, or maybe they are just right.
According to Thomson Reuters, the volume of high-yield corporate debt in 2010 is now above $300-billion (U.S.), approaching double the old record of $185-billion.
That was set back in 2006, the last year before markets went into a tailspin and investors began asking themselves if they really should have bought all that debt that was funding everything from share buybacks to special dividends to huge acquisitions.
The fourth quarter, which is far from over, is already the biggest quarter on record for proceeds and number of deals, Thomson Reuters said. There have been 186 deals to raise $90.4-billion since Oct. 1.
It's hard to fault issuers for selling bonds and loans when the spreads on junk-rated debt are so low. Issuers selling high-yield debt now pay a premium of less than 4 percentage points over investment grade debt.
Investors have been swallowing up the bonds as they hunt for yield in a low-intereste-rate environment, betting that default rates will remain low and companies will be able to refinance the debt or pay it off if the economy improves.
So far, even with the huge volume and the large returns in the past couple of years, analysts are still saying there's more upside to be had.
Junk bonds are likely to be the best performing type of fixed income asset next year, Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia, told Bloomberg News.
"Now that we're through 2010, when falling yields drove increased prices across the bond spectrum, many investors are really looking towards higher spreads as the only way to earn outsized returns for 2011," Mr. LeBas said. "You simply can't get the kinds of returns investors are used to in investment-grade or Treasuries or other products."
To borrow another sports reference, this seems a bit like deja vu all over again.