His firm paid 68 cents on the dollar last July for bonds issued by AOL Time Warner Inc. They now fetch 113 cents on the dollar.
Bonds from Sprint Corp., Muzak Holdings LLC and Nextel Communications Inc. are just a few others that also have seen considerable jumps. "What's working?" says Mr. Wagner, sifting through his list of $4 billion in holdings. "Everything."
It is the best of times for investors such as Mr. Wagner, chairman of Golden Tree Asset Management LLC, a New York firm that invests in high-yield debt, better known as junk bonds.
For the past eight months, junk bonds have shined, rising 27%, according to Banc of America Securities LLC of San Francisco.
Main Street investors have noticed, and poured $11 billion into mutual funds specializing in junk bonds during the first three months of the year, double the amount in the same period last year.
Investment bankers are finding eager audiences for new junk-bond deals at a time when the market for initial public offerings of stock is its slowest in nearly 30 years.
But now that everyone is piling into junk bonds, Mr. Wagner is selling.
"We've had a powerful, powerful move," says Mr. Wagner, who has been a player in the market since 1977, including a stint working for infamous junk-bond king Michael Milken at Drexel Burnham Lambert Inc. in New York. "One thing I know, markets don't go straight up for long."
The decision by some savvy investors to curtail their holdings of junk bonds is just one of the risks participants in this volatile market face.
Some experts worry that junk-bond issues being sold today are getting junkier. And while high-yield departments of the big investment houses are busier than in years, the activity isn't enough to offset weaknesses in other businesses.
That said, plenty of investment pros continue to buy junk these days.
Last week, Primedia Inc. in New York sold $300 million of junk bonds. And Royal Caribbean Cruises Ltd. of Miami sold $250 million.
Junk bonds are debt rated below investment grade. They pay considerably fatter yields than safer bonds, like U.S. Treasuries, to compensate investors for the greater risk of the company defaulting on its obligations to bondholders.
Despite the risk, junk's value has soared since mid-October. One reason is that fewer junk bonds are defaulting, according to Moody's Investors Service. And many individuals started investing in junk after Warren E. Buffett said in March that he had increased his junk-bond holdings sixfold in 2002.
The junk revival is reverberating throughout Wall Street's power structure.
At
Credit Suisse First Boston Corp., Bennett Goodman, former head of leveraged finance, was appointed chairman of merchant banking in February, and joined the firm's executive board and operating committee.
The move came as CSFB was slashing investment banking staff and is attempting to restore its reputation after the recent stock-analyst scandals.
"Upward mobility at CSFB comes from being on the bond side these days," says Richard Lipstein, a managing director at headhunter Gilbert Tweed Associates Inc. in New York.
CSFB is the No. 2 underwriter of new junk-bond issues this year, according to New York-based Thomson Financial, trailing
Citigroup Global Markets Inc., formerly known as Salomon Smith Barney Inc.
These two firms paid the biggest fines to settle charges that their stock research was tainted by investment banking conflicts, but that doesn't bother bond investors. "It's a different business," says Golden Tree's Mr. Wagner.
Junk bonds started rallying in mid-October, after a steep drop following the collapse of companies such as WorldCom Inc. and Adelphia Communications Corp.
Better investigators?
Although junk bonds and stock prices typically move in concert because their values are based on expectations of future corporate performance, the bonds performed vastly better than stocks late last year.
That led some mutual fund investors to boost their speculative-debt holdings on the theory that perhaps money managers in that arena were uncovering opportunities that others had missed.
"It's commonly said that bond investors see things about companies or the economy that stock investors don't," says Martin Fridson, president of research firm FridsonVision LLC and former high-yield strategist at Merrill Lynch & Co. Inc. "I think most of that is baloney."
Though the junk bond rally is giving investment bankers and brokers some much-needed work, it isn't enough to reverse the securities business' broad slump.
The Securities Industry Association last week said that more than 37,000 Wall Street jobs have been eliminated during the past two years, the most on record. Most investment banks are deploying existing staff from other departments to handle junk-bond business rather than hiring new staff.
"You aren't seeing any increase in demand from a headcount perspective," says Andrea de Cholnoky, co-head of investment banking at recruiting firm Spencer Stuart.
Wall Street has sold more than 120 junk bond offerings so far this year, raising over $35 billion, according to Thomson Financial. But only six IPOs have been held so far this year, raising $644 million of proceeds.
Some of the newer deals look pretty junky, says Mr. Wagner of GoldenTree, so he's passing.
"This is what you see after every rally," he says. "The quality of what Wall Street sells declines, but it gets bought anyway because it's hot. That's when people get hurt."
