The extended volatility in the high-yield bond market has taken many institutional investors by surprise.
"I was not surprised at the degree of the losses in August, but I am surprised by how long the volatility has continued," said Beth Wahlig, a portfolio manager at General Motors Corp.'s pension fund.
Ms. Wahlig made her remarks during a panel discussion at the Strategic Research Institute's high-yield bond symposium in New York last week.
Ms. Wahlig said the downturn in junk bonds over the past three months has been exacerbated by investors who entered the market in the past two years-mostly managers of hedge funds and arbitrage funds.
In July, junk bond issuance surpassed last year's record issuance of $124 billion, according to Securities Data Co. This record issuance was met by huge pent-up demand.
"But will we see that kind of demand going forward?" Ms. Wahlig asked. "I don't think so, because I think the hedge funds and arbitrage funds will pull out."
All of the investors on the panel expressed cautious optimism that this might be a good buying opportunity.
"No one is really sure where the bottom is," said Jane Nelson, a Chicago-based portfolio manager at ING Capital Advisors.
"This week we have seen some firmness in the market, for the first time in months. We have seen some investors coming back into the market who were in cash," Ms. Nelson said.
That may not be good news for the dozens of companies that have pulled out of the market in recent months rather than pay the steeper prices demanded by investors.
Meanwhile, investment bankers have started demanding higher up-front fees from companies looking to issue junk bonds, as compensation for taking on more risk that they might not move the bonds quickly from their books.
"These fees have been long gone in our market. Now they're back," said panelist Anthony Clemente, a portfolio manager with Invesco.
The higher fees, combined with larger interest rate spreads, mean that an uptick in the secondary market might not translate into more issuance.
Commercial banks have played a bigger role in high-yield bond issuance over the past two years, consistently underwriting 20% to 22% of junk bonds in most quarters.
Ms. Wahlig advised investors in the audience to mine the secondary junk bond market.
"Most of the pricing has been pretty rich this year," she said. "I think the secondary market is where people should be playing to build up their portfolio."