Junk bonds around the world outperformed investment-grade debt in 2012 by the biggest margin since 2010 as record-low central bank rates pushed investors to seek riskier, higher-yielding assets.
Securities such as that of the American wireless telecoms provider Sprint Nextel and the car maker Fiat returned 18.7 per cent, compared with 10.9 per cent for high-grade notes, Bank of America Merrill Lynch index data shows. That also beat the 4.4 per cent investors made on government bonds and the 16 per cent gain from stocks, based on the MSCI World Index.
The European Central Bank (ECB) vow to prevent a euro-zone break-up and signs of improving US economic growth stoked demand for alternatives to record-low yields on higher-rated securities. Sales of junk bonds worldwide soared 35 per cent to a record US$425 billion this year as the global default rate, according to Moody's Investors Service, dropped to 2.7 per cent from an average 4.8 per cent since 1983.
"This was another year for the risk taker," said Margie Patel, a money manager at Wells Fargo in Boston who oversees about $1bn. "Defaults were low and there were virtually no negative surprises in terms of out-of-the-blue" events.
Returns on junk bonds, which are rated below Baa3 by Moody's and BBB minus at Standard & Poor's, accelerated in the second half after the ECB president Mario Draghi pledged to buy unlimited amounts of government debt and the Federal Reserve stepped up its purchases of securities to stimulate lending and boost spending.
Investors earned 9.7 per cent since the end of June, compared with 8.2 per cent in the first half.
European junk bonds outperformed those in the United States, with Bank of America's Euro High-Yield Constrained Index returning 27 per cent this year, compared with a gain of 15.6 per cent for its US High-Yield Master II Index.
"Most credit asset classes outperformed expectations and high yield was well beyond what most people thought," said Sabur Moini, a portfolio manager who oversees about $2.5bn of high-yield assets at Payden & Rygel in Los Angeles.
* Bloomberg News