Wall Street analysts are calling the junk bonds that individual investors are dumping one of the best bets for 2015.
The debt just suffered its worst performance since 2008 — a 2.5 percent return last year that’s less than half the average yield on the risky U.S. securities — and individual investors are still selling. They yanked $1.5 billion from junk-bond mutual funds in the past week, the eighth consecutive week of withdrawals, according to a Thursday Wells Fargo & Co. report. This isn’t deterring analysts at Goldman Sachs Group Inc. to Morgan Stanley from recommending speculative-grade debt. They say its underwhelming performance has only boosted the potential for returns in 2015. The Federal Reserve is keeping benchmark borrowing costs low even as the outlook for the U.S. economy improves. Cheap credit is a good thing for the most-indebted companies, even though it didn’t make for the banner year Goldman called for in 2014.
“As we did last year, we recommend an overweight to high-yield bonds and bank loans,” Goldman Sachs’ analysts wrote in a January investment outlook. “We expect both sectors to outperform investment-grade bonds and cash in 2015.”
The debt has eked out a 0.1 percent gain this month, according to Bank of America Merrill Lynch index data. Last year’s love of junk bonds ended badly as plunging crude prices eroded appetite for risky debt, particularly obligations of energy companies that account for an increasing proportion of the high-yield market. U.S. high-yield securities tumbled 3 percent in the last six months of the year.
“Unlike our cautious view for most of 2014, we are bullish on high-yield for this year,” Morgan Stanley credit analysts led by Adam Richmond wrote in a report Friday. “We think risk/reward is very attractive.”
