NEW YORK, March 7 Bank of America Merrill Lynch
analysts said on Tuesday they see a "new phase of euphoria" for
the U.S. junk bond market as persistent demand will likely
reduce risk premiums in the sector in the coming months.
They, however, cautioned investor optimism for high-yield
bonds could flag in the second half of 2017.
"We do think we are entering a new phase of euphoria that,
dare we say it, leads to indiscriminate beta compression circa
2014," Bank of America Merrill Lynch analysts said in a research
note published on Tuesday.
They noted back in 2014, junk bonds' risk premiums or yield
spreads versus Treasuries contracted as the Federal Reserve
began its tapering of bond purchases under its quantitative
Last week, several Fed officials said the U.S. central bank
is considering a faster pace of interest rate hikes in 2017 as
the economy is approaching full employment and inflation is
closing in on the Fed's 2 percent goal.
Investor confidence about faster U.S. growth was buoyed
following U.S. President Donald Trump's speech before a joint
session of Congress a week ago.
On the following day, the Dow crossed the 21,000
level for the first time, while the S&P 500 reached
The average yield spread on junk bonds narrowed to 360 basis
points on Friday, albeit still wider than its record tight of
about 235 basis points, according to Bank of America Merrill
They said the sector's rally will likely continue to the
riskier bonds issues with those rated CCC or lower.
Bank of America Merrill Lynch's U.S. high-yield bond index
has gained 2.817 percent year-to-date.
"Although we think the optimism has likely gotten ahead of
itself, we do think the bid for yield and risk continues for the
next several months," the analysts wrote.
(Reporting by Richard Leong; Editing by Chizu Nomiyama)