Prices of so-called junk bonds fell sharply Tuesday, in contrast to the panic-born resurgence of Treasury securities.
While the Treasury's closely watched 30-year bond rose 2 1/16 points, or about $20 for every $1,000 in face value, the price of the typical junk bond was down about 3 points on the day, and some lost as much as 5 points.
Junk bonds--more politely known as non-investment grade corporate bonds--are commonly used to finance corporate takeovers. They are considered speculative, offering high yields to investors willing to bear the relatively high risk that they will not be fully paid off.
Amid the recent stock market collapse, investors have been pulling back from risk-taking opportunities, and junk bonds have suffered.
Some Wall Street traders and analysts observed that twin fears--of a liquidity crisis in the market and of a weakening in the nation's economy--were factors making buyers leery of junk bonds.
The Beverly Hills office of Drexel Burnham Lambert is the command center of the junk bond business, with more than 50% of the junk bonds' market. Steven Anreder, a senior vice president at the Beverly Hills office, declined to discuss prospects for improvement in junk bond prices, saying Drexel never makes such predictions.
Anreder conceded, however, that "there hasn't been much volume activity" in the securities.
The executive in charge of a junk bond fund for one New York money management firm attributed the drop in price to a combination of selling by mutual funds and a reluctance of major securities dealers to buy when they are "being hit on the stock side. "There is no question that no-load mutual funds have been hit by redemptions; I don't know how badly . . . I guess it is not crisis proportions, but large." The executive, who spoke on the condition that he not be identified, said he believes that investment in junk bonds--and their prices--will revive after the spate of selling "dries up and we see people spending," a process that he predicts might take "the best part of two weeks."
At a major New York investment house, a spokesman said junk bond prices were depressed by the "ample" supply of such bonds, the relatively high volume of new issues and the fact that "cash available for investment has not grown proportionately."
The spokesman, who asked that his firm not be named, also observed that when questions are raised about the health of the economy, money moves into very high-quality investments.
Since many firms sell assets to pay interest on their high-yield bonds, observers noted, the value of such assets could be affected by a huge drop in the stock market.