FILLFILL Barclays Sees U.S. Junk Bonds Returning 7%-8% In 2010

Junk bond investors shouldn't bank on double-digit returns in 2010, according to analysts at Barclays Capital, who predict that earning a high single digit yield may be the best portfolio managers can hope for next year.

The junk bond market has staged an impressive comeback in 2009, returning more than 52% since January. Cash-rich investors, eager to put money to work, have driven up average prices on these risky bonds to 92 cents on the dollar from lows of around 55 cents in December 2008.

But this year's performance may have eaten into future returns and Barclays' analysts predict that junk bonds could return 7%-8% next year. This is below the expectations of some other market participants, such as Kenneth Taubes, head of portfolio management at Pioneer Investment in Boston, who estimates that junk bonds could return 10% to 11% in 2010.

Either way, returns are expected to be less than one-firth of the record returns seen this year. Through November high-yield bonds have returned 53.18%, according to Barclays. That's nearly 7% beyond the previous record set in 1991, and 2009 has claimed five of the top 11 monthly returns of all time, according to the bank.

"Just as 2008 marked a flight to quality 2009 reversed the trend," the analysts, led by Bradley Rogoff, wrote in a note published Friday.

The expected returns may not seem much by comparison - Barclays' analysts note that returns of 7% to 8% would rank only 15th out of 27 years of the High Yield Index - they are probably realiztic given the expected headwinds in 2010. The main concern is whether economic recovery will stall once governments begin to unwind fiscal stimulus programs and raise rates.

As such demand will not be as "robust" next year. Even so, it should still be supportive for the asset class, according to the analysts, who anticipate that 2010 supply will be $120 billion to $130 billion, with refinancing continuing to represent the dominant use of proceeds, and deals to back acquisitions increasing from 2009 levels.

Speculative-grade companies have sold more than $131 billion of high-yield so far this year, according to data provider Dealogic. That is about three times the $47.7 billion issued in all of 2008.

-Kate Haywood, Dow Jones Newswires; 212-416-2218; [e-mail]