In the mad dash for yield it’s a case of “here we go again”. No one cares about risk, or valuation. It is doubtful anyone cares about relative values. In fact, it appears as if there is no care at all.

This is part of the reckless “success” Bernanke initiated with Quantitative Easing Part II that he is now bragging about.

Please consider Junk Borrowers Turn Tables With Looser Terms.

MGM Resorts International and CommScope Inc. are leading junk-rated companies selling debt with less protection for investors as high-yield bond offerings soar to more than double last year’s weekly pace.

MGM’s CityCenter Holdings LLC joint venture issued $600 million of notes that can pay interest in cash or additional debt, the largest such offering in more than a year, according to data compiled by Bloomberg. CommScope sold $1.5 billion of bonds with covenants that permit a “disturbingly high” amount of new debt, research firm Covenant Review LLC said.

“Credits that even a year ago, six months ago, would have had trouble coming, are having no trouble,” said Marc Gross, a money manager in New York at RS Investments, which oversees $3 billion in its fixed-income funds.

Sales in the U.S. of junk bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s, rose to $13.3 billion, compared with the $5.41 billion weekly average in 2010, Bloomberg data show. Returns this month of 1.3 percent compare with 0.28 percent on investment-grade company bonds, according to Bank of America Merrill Lynch index data.

“There’s a lot of funds going into high-yield and the people who are managing high-yield, they’re sort of forced to put their money in something, and the broker-dealers are not their friends,” said Adam Cohen, founder of New York-based Covenant Review, which analyzes investor safeguards included in corporate bond offerings.

Ally, a unit of the lender previously known as GMAC Inc., more than doubled the size of its offering of asset-backed securities from $500 million, according to a person familiar with the sale.

The largest top-rated portion, a $750 million slice maturing in 2.99 years, yields 87 basis points more than the benchmark swap rate, said the person, who declined to be identified because terms aren’t public.

The bonds are backed by so-called floor-plan loans that car dealers use to buy inventory.

The difference between the yield premium on speculative- grade corporate bonds and investment-grade debt has tightened to 355 basis points and reached as low as 348 basis points on Jan. 5, the narrowest since November 2007, according to Bank of America Merrill Lynch index data.

Companies sold a record $286.7 billion of high-yield bonds last year, when issuance averaged $5.5 billion a week, Bloomberg data show. Investment-grade corporate bond offerings this week totaled $26.3 billion, 61 percent higher than the 2010 average of $16.3 billion.

Polymer Group Inc.’s $560 million of eight-year debt sold this week included a condition that allows the company to call 10 percent of the bonds at 103 cents on the dollar in each of the first four years, according to a person familiar with the transaction.

The offering shows Polymer Group is trying to lock in low interest rates while getting the flexibility to repay debt any time, as it would with a loan, RS Investments’ Gross said.

“That is a very onerous feature,” Gross said. “It is not a good sign that investors are not fighting back.”

Junk is rising and retail investors are chasing it, in spite of “onerous features”. This is supposed to work out well?

Mike “Mish” Shedlock
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