High-yield portfolio managers are once again looking at high-grade names, as the recent stock market rally has had a more demonstrative effect on the high-grade market than on high-yield. These names began seeing interest from high-yield portfolio managers as early as May (BW, 5/26) but have dropped in price considerably since then.
Tom Reedy, portfolio manager at OppenheimerFunds, says the firm has been buying five- to 10-year issues of Cox Communications, Tyco International, AOL Time Warner, as well as Qwest Communications, a fallen angel, and plans to continue buying the paper. All of these names were severely beaten down due to accounting concerns, but Reedy believes the bulk of the news is out, and that the bonds will now trade on longer-term fundamentals.
Last Thursday afternoon, the AOL 6.875% notes of '12 (Baa1/BBB+) were trading at 92.5, while the Cox 6.75% notes of '11 (Baa2/BBB) traded at 93.5. Tyco's 6.375% notes of '11 (Ba2/BBB-) were bid at 81 and the Qwest 7.25% notes of '11 (B2/B) were bid at 56.
Mike Taylor, high-yield strategist at Bear Stearns, says the firm's research group is recommending a number of high-grade names to high-yield investors. He says junk managers who saw an opportunity when high-grade managers sold these issues three months ago can now benefit from high-grade buying, as high-grade managers buy the same names they sold earlier, fearful of under performing benchmark indices. The names offer other benefits as well, he says. "Some of these names may still get downgraded--even to high-yield, but it's still arguable that in some cases you get better asset protection and better value," he says.