Though the junk bond market has come roaring back to life, it remains an expensive source of credit for many companies.
Since the high-yield market turned around last month, the average spread over comparable Treasuries has narrowed to 618 basis points, said Sam DeRosa-Farag, the chief high-yield strategist at Donaldson, Lufkin & Jenrette.
Though that is down considerably from the high spread of 780 basis points in October, it is well above the 300- to 400-basis-point range for junk bond spreads early this year.
"The spreads have already tightened considerably," Mr. DeRosa-Farag said. "But the market has not yet fully recovered."
Many market observers said they had expected spreads to narrow much faster than they have since mid-October. The high-yield market generally trails the public stock market, which has rallied to record levels after a sharp correction in August and September.
Still, many noninvestment-grade companies are choosing to pay steeper rates now rather than take their chances on the junk bond market's direction.
"They haven't forgotten the lesson of August," said Martin Fridson, Merrill Lynch & Co's high-yield strategist. The junk bond market, which had an unprecedented first half this year, ground to a screeching halt in August and September.
"While companies could wait for spreads to narrow further, if there is another market shock, the high-yield market could shut down entirely," Mr. Fridson said.
But what makes the bonds pricey for issuers is a boon to investors, many of whom have gone on a bargain-hunting spree.
"With these spreads, you could still absorb some losses and come out ahead," said Margaret Patel, a high-yield fund manager at New York-based Third Avenue Funds. She said she expects the bargains to continue into early next year.
Retail investors made net investments of $550 million to $650 million in high-yield mutual funds during each of the past three weeks, according to AMG Data Services.
That was down from an average net investment of about $1 billion a week during the three prior weeks but closer to the weekly average AMG has reported this year. The strong investor appetite in recent weeks was a real turnaround from high-yield funds' steady outflows in September.
This has led to pent-up demand for new junk bonds. Investors gobbled up $9.7 billion of new high-yield issues in November, according to Securities Data Co.
New issuance bottomed out at $2.9 billion in September and crept up to $4.6 billion in October, Securities Data said.
Donaldson Lufkin estimated that about $4.3 billion worth of high-yield deals are on the forward calendar. That is still a far cry from this year's calendar peak of $11 billion.
"But many issuers are trying to get to market so fast now that deals are priced before they make the forward calendar," Mr. DeRosa-Farag said.
One component still missing from the high-yield market recovery is a firm commitment from market makers, Merrill's Mr. Fridson said. "Some dealers have been holding back from making markets because they got beaten up so badly in August," he said.
If the market makers come back in full force, January-typically a good month for junk bonds-could turn in a strong performance, he said.
But at the end of the fourth quarter, the market is still not open to all comers. Well-regarded companies with a history of acceptance in the high-yield market, not first-time issuers, have dominated this quarter.
In the last three weeks, investors began buying issues from well-known B-rated companies again. When the market first reopened about a month ago, issuers were primarily near-investment-grade BB-rated companies.
"I think we're moving step-by-step along the quality spectrum," Mr. Fridson said. "But that's typical to see a concentration on higher quality and familiar names when the market reopens."
But most market observers do not expect to see many bonds priced for the really low-rated issuers, such as the CCCs, any time soon.