Goldman sees "interesting market opportunity" in U.S. high yield

By Peter Heap

New York, Oct. 4 - U.S. high-yield bonds offer an "interesting market opportunity" to investors although they need to be prepared for "challenging" conditions in the next one to three months, analysts at Goldman, Sachs & Co. said in their review of September and outlook for October.

In particular, the firm's analysts believe there are appealing investments in the wireless, cable, business services, energy, gaming and similar sectors.

However they rate the wireline telecom sector as "speculative" and consider it suitable only for investors in distressed securities.

Excluding wireline telecom, the Goldman analysts say market aggregate spreads are currently 872 basis points, something they describe as "still attractive."

In addition, they anticipate a positive performance for the remainder of this year.

"We expect that in 2001 the US HY market will likely return in the low single digits (2%-4%), dependent on a resolution of key events in the terrorist crisis," the analysts wrote. The year-to-date performance through the end of September is negative 4.04%.

"We are also currently projecting a 10-12% return for 2002, based on 2002 and preliminary 2003 default estimates."

In coming to their conclusion, the Goldman analysts said they looked at three key valuation issues:

--Spreads have risen 152 basis points on a market-weighted basis and have never been higher this year, they said, adding that even in 1991 they did not reach such a high level despite 11% defaults rates. Current spreads are "significantly wider" than the long-term mean of 500 basis points.

--Defaults are expected to rise, but the spread widening since September should compensate, the analysts said. They have increased their forecast default rate to 11.4% from 11.2% for 2001 and to 7.5% from 6.1% for 2002.

--The markets will be closely watching military action, whether consumers respond to the stimulus from the Federal Reserve and federal government action, and whether previously strong telecom and cable companies are forced to restructure.

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