count the junk bond market among those sending relatively optimistic signs about a donald trump administration. prices are dropping, and money has been flowing out of high-yield bond funds. but risk premiums haven<u+2019>t risen, and companies are still issuing bonds<u+2014>suggesting that a market renowned for picking up early signs of economic stress retains a benign outlook on the u.s. economy. on tuesday, weatherford international plc sold $540 million of bonds<u+2014>$40 million more than initially expected. the same day, the oil-field services company was assigned a lowly triple-c rating by fitch ratings, a four-notch downgrade from its previous rating. not every new bond offering has been a hit. investors have pushed for a higher interest rate on a $750 million bond from the xerox corp. spinoff conduent inc., a person familiar with the matter said. but most sales have gone smoothly, and junk-rated companies have issued more than $5 billion in bonds since the election, according to lcd, a unit of s&p global market intelligence. the volume of new bonds comes despite recent outflows from high-yield bond mutual funds and exchange-traded funds, suggesting fund managers had built up cash positions before the outflows. in the three weeks ended nov. 16, investors pulled $7.1 billion from high-yield funds, according to lipper, the largest three-week outflow since december 2015. a major catalyst behind the outflows seems to have been rising government bond yields, largely caused by concerns that inflation may be gathering momentum after years of near absence. the election exacerbated those fears. mr. trump has promised large tax cuts and increased infrastructure spending, which analysts believe could spur higher inflation along with faster economic growth. inflation erodes the real returns of bonds, causing their prices to drop in the secondary market. yields on junk debt have risen to their highest levels since august. but the move has been almost entirely due to rising yields for government bonds rather than any perceived deterioration in credit risk. the average junk-rated corporate bond<u+2019>s yield was 6.74% at the end of friday, up from 6.42% on election day, according to bloomberg barclays data. meanwhile the spread over benchmark government bonds<u+2014>the premium investors demand to buy riskier debt<u+2014>had declined to 5.1 percentage points from 5.17 percentage points. that implies investors aren<u+2019>t any more worried about holding low-rated bonds. companies don<u+2019>t seem that worried, either. the recent bond issuance in part reflects concern that treasury yields could move higher and push up borrowing costs. but companies also are encouraged by investors<u+2019> strong appetite for their debt. fixed-income investors say junk-rated corporate bonds should fare relatively well in a rising rate environment. their hefty yields can serve as a cushion against rising government bond yields. an improving economy should also benefit junk bonds by helping keep more vulnerable businesses out of default. junk bonds have returned an average of 4.77% during 15 periods when government bond yields rose by at least half a percentage point since 1998. returns on investment-grade corporate bonds averaged negative 0.66% over those periods, and the 10-year treasury note returned negative 5.48%, according to an analysis by tiaa global asset management. this ability of junk bonds to withstand rising government bond yields is <u+201c>not widely understood or appreciated,<u+201d> said kevin lorenz, a managing director overseeing high yield strategies at tiaa, which has $915 billion in assets under management. after posting their first negative return since 2008 last year, junk bonds have returned 14.11% this year, according to bloomberg barclays data, buoyed by an improving economic outlook and intense demand for higher-yielding assets at a time of ultralow interest rates. investment-grade corporate bonds have returned 5.32%. fund managers themselves are divided about just how bullish to be on lower-rated bonds. for some, including mr. lorenz, the main threat to junk bonds is still an economic downturn, suggesting higher-quality, double-b rated bonds are a better bet than lower-rated triple-c rated bonds even though higher-quality bonds have lagged behind since the election given their greater sensitivity to rising treasury yields. others, though, are willing to go with the recent trend. when <u+201c>the economy is on sound footing, the consumer is strengthening, that<u+2019>s clearly good for risk,<u+201d> said walter kilcullen, a portfolio manager at western asset management, which manages assets of about $445 billion. <u+201d>and when you look at triple cs, they still offer quite a bit of yield." write to sam goldfarb at sam.goldfarb@wsj.com
junk bond investors appear bullish on donald trump administration - wsj
sam goldfarb