T. Rowe Sees Food Fight Over Newest Junk Bonds: Credit Markets

Bond market volume drop has managers looking at junk-grade products.

Aug. 6 (Bloomberg) -- The value of new junk bonds is rising by the most in at least three years relative to outstanding debt as low trading volume and faster cash inflows into mutual funds force investors to jockey for initial offerings.

New speculative-grade issues have outperformed Barclays Plc’s high-yield index by about 1.8 percent this year, more than in 2011 and 2010. Notes from Smithfield, Virginia-based Smithfield Foods Inc., the largest U.S. pork processor, rose 5.8 cents to 105.3 cents on the dollar since being sold July 18, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

 Investors are looking further down the credit spectrum in search of returns as the Federal Reserve holds benchmark interest rates near zero through at least late 2014 to help jump-start an economy in which the unemployment rate has held at 8 percent or more for 42 months.

Junk-bond funds received $9.32 billion of inflows in July, the most since February, EPFR Global data show.

“Managers like ourselves that don’t get the allocations they want will go back into the secondary market to fill out orders,” T. Rowe’s Vaselkiv said in a telephone interview. “We typically end up paying more than the offering price to fill out allocations.”

Smithfield sold $1 billion of 6.625 percent, 10-year notes on July 18 in the company’s first debt sale in more than three years, increasing the size from $650 million, a person familiar with the transaction said at the time of the deal who asked not to be identified because the terms are private.

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