Sideways-moving economy, equities prolonging junk rally, says Bear Stearns' Taylor

Paul A. Harris

St. Louis, April 29 - With a non-annualized year-to-date return of 13.29% through April 28, the high-yield market's 2003 performance - even with 246 days of the year still remaining (!) - would rank seventh best when compared to past FULL-YEAR gains, according to analyst Mike Taylor of Bear Stearns & Co.

So far, so good. But how long will the rally in high yield last, Prospect News asked Taylor on Tuesday.

"It will last as long as equities trade on a sideways trajectory, so that they are not attractive enough to get assets moving back into equities," he said. "I think that's what really slows it down because in this low-interest rate environment, with choppy equity markets, high yield continues to look attractive on a yield basis.

"As long as we don't dip into recession again, high yield will probably keep on rallying."

Numerous market sources have said recently that the present rally hinges on technicals - the money flowing into the asset class creating a tight supply and driving up prices - rather than on fundamentals, such as an improving economy and positive earnings reports. Prospect News asked Taylor if that is also the way he sees it.

"Pretty much, because not much has changed on the economic landscape from a few months ago, when we were at a low point back in October," he responded.

"Nor have earnings been incredibly strong. I guess they haven't been weak enough to cause money to flow away from the asset class, and fixed income in general.

"But high yield can't rally forever," he said. "There gets to be an upside because stuff hits a call-price target and gets capped out. As that percentage of the universe grows you're kind of limiting your upside.

"But there is still room in terms of issues that are trading below call price. It's funny to talk about that when six months ago people were thinking just about credit concerns, as opposed to interest rates and call constraints."

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