With the easy money already made in junk bonds this year, market players' new task is bargain hunting credit by credit.
Investors can no longer ride the rising tide that lifted all ships so far in 1991, traders and money managers say. With many high-yield indexes up 25% in the first four months alone, the sector is now far more credit-specific -- not so much a junk bond market as a market of individual issues, they say.
That means slow, range-bound trading, especially in the top tier, where clipping coupons will increasingly replace capital gains as investors' chief source of income.
"I think the market got so oversold last year that it was relatively easy to have a gain the way we have had in the first half," said Michael Satzberg, principal at 1838 Investment Advisors L.P. in Philadelphia. "From these levels, it's a lot tougher to see those kinds of gains."
For lack of a better focus, high-yield bonds traded off equity prices last week, inching 1/4 point higher Friday as the Dow Jones industrials climbed more than 20 points.
"There's not a lot of activity, but it's been creeping up," said David Feinman, high-yield trader at Jefferies & Co. In Los Angeles. "We go up and down with the stock market a bit, but that's all."
Yet "certain things have moved very fast," Mr. Feinman noted, pointed to last week's solid gains by bonds of Kaiser Aluminum & Chemical Corp.
Kaiser Aluminum's 14 1/4 of 1995 tacked on more than two points to trade at 104 1/2 on news that the company will again try to cut its debt with an initial public stock offering. STock buyers balked earlier this year when Kaiser tried to tap the equity market at $20 to $22 a share. The company has now lowered that target to $15 to $17.
Elsewhere, National Gypsum Corp.'s 11 3/4s inched one point higher midweek, lifted by talk that the company was making headway in its Chapter 11 bankruptcy.
Lionel Corp.'s 12 3/8s of 1996 went the other way, slumping three points Friday, to 15 cents on the dollar, as the toy maker sought bankruptcy protection.
But by and large, "we're still in the trading range we've been in since the war rally ended," said Kevin Matthews, high-yield portfolio manager at Lisle, Ill.-based Van Kampen Merritt Inc., noting the market has a strong bid but little supply.
"We're fortunate that we're pretty fully invested now, more so than we've been this year," because of the difficulty in findinb bonds to buy or swap, he said.
"I wouldn't count on seeing what you've already seen this year," Mr. Matthews continued. "But obviously if [the market] just stays were it is, with the enormous dividends high-yield funds pay, you're looking at 20%-plus returns" for the year.
William Veronda, high-yield fund manager at Invesco Trust Co. in Denver, said recent signs that the economy is again on its feet will continue to support high-yield bonds.
But "we did have bankruptcy that was not fully anticipated today," he said, referring to Lionel. "That served to remind us that -- rising tide or not -- there are still some ships that are so leaky they're going to go down anyway."
Mr. Veronda said despite signs of economic recovery, junk bond buyers must look long and hard at new purchases now more than ever.
"Traditionally, one of the most vulnerable periods for weakened companies is when you're emerging from recession and companies realize they must now restock inventories," he said.
Despite strength in the secondary market, where long-term high-grade corporate bonds advanced 1/4 point Friday, corporate borrowers avoided the primary sector.
Meanwhile, underwriters led by Lehman Brothers set rates on a three-part $444 million mortgage pass-through offering from the Resolution Trust Corp., the thrift bailout agency's first such issue.
The securities are backed by adjustable-rate mortgage from Columbia Savings & Loan in Beverly Hills, Calif., which is in RTC conservatorship.
The $364.36 million of class A securities were priced at 100.50 to yield 175 basis points above the bond equivalent yield on six-month Treasury bills. There is a 12.75% net life interest rate cap.
The securities are being sold through a special purpose vehicle, Resolution Trust Corp. 1991-1.
Underwriters expect an Aa2 rating from Moody's Investors Service and an AA from Standard & Poor's Corp.
Elsewhere, Key Corp. was poised to raise Tier 1 capital with with fixed-rate perpetual preferred stock.
The $150 million offering, to be sold through Salomon Brothers Inc., was being shopped with a 9.875% dividend.