By F McGuire From Newsmax

Junk-bond investors are “sending relatively optimistic signs” about a Donald Trump administration, The Wall Street Journal reports.

“Prices are dropping, and money has been flowing out of high-yield bond funds. But risk premiums haven’t risen, and companies are still issuing bonds—suggesting that a market renowned for picking up early signs of economic stress retains a benign outlook on the U.S. economy,” the Journal explained.

Overall, junk-rated companies have issued more than $5 billion in bonds since the election, according to LCD, a unit of S&P Global Market Intelligence.

The volume of new bonds comes despite recent outflows from high-yield bond mutual funds and exchange-traded funds, “suggesting fund managers had built up cash positions before the outflows,” the Journal explained.

In the three weeks ended Nov. 16, investors pulled $7.1 billion from high-yield funds, according to Lipper, the largest three-week outflow since December 2015.

A major catalyst “behind the outflows seems to have been rising government bond yields, largely caused by concerns that inflation may be gathering momentum after years of near absence. The election exacerbated those fears. Trump has promised large tax cuts and increased infrastructure spending, which analysts believe could spur higher inflation along with faster economic growth,” the Journal reported.

Inflation erodes the real returns of bonds, causing their prices to drop in the secondary market, WSJ.com said.

Meanwhile, yields on junk debt have risen to their highest levels since August. “But the move has been almost entirely due to rising yields for government bonds rather than any perceived deterioration in credit risk,” the Journal explained.

The average junk-rated corporate bond’s yield was 6.74% at the end of Friday, up from 6.42% on Election Day, according to Bloomberg Barclays data. “Meanwhile the spread over benchmark government bonds—the premium investors demand to buy riskier debt—had declined to 5.1 percentage points from 5.17 percentage points. That implies investors aren’t any more worried about holding low-rated bonds,” the Journal reported.

“Companies don’t seem that worried, either. The recent bond issuance in part reflects concern that Treasury yields could move higher and push up borrowing costs. But companies also are encouraged by investors’ strong appetite for their debt.”

To be sure, prominent investors attending the recent Reuters Global Investment Outlook Summit expect the Trump presidency to extend the aging, seven-year bull market in U.S. stocks.

Expectations that Trump will successfully engineer massive new infrastructure spending, slash corporate and some personal income taxes, and wipe out a slew of regulations may boost prospects for U.S. stocks, and end what some investors call a three-decade bull market in bonds, Reuters reported.

“The earnings impact of President-elect Trump will outweigh whatever increase in bond interest rates comes about,” said Steven Einhorn, vice chairman of hedge fund Omega Advisors Inc, which invests about $4 billion.

Einhorn expects U.S. stocks to return as much as 8 percent in 2017, including dividends.

“The risks are to the upside for the (Standard & Poor’s 500) rather than the downside,” he said.

(Newsmax wire services contributed to this report).

Image: WSJ: Junk Bond Market Signals Market Optimism Over Trump
(Dollar Photo Club)

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