High Yield Bond Market

GAO discussed: (1) the use of high-yield bonds in corporate takeovers; and (2) federally insured thrift institutions' high-yield bond investments. GAO noted that: (1) high-yield bonds provided 12 percent of financing for hostile corporate takeovers, although some initial financing sources were refinanced using high-yield bonds; (2) the high-yield bond market grew from about $9 billion in 1977 to $180 billion at the end of 1988; (3) high-yield bonds facilitated merger financing and thrifts' commercial lending abilities, and provided small- and medium-sized firms with access to long-term capital markets, higher returns, and opportunities to diversify geographically; (4) the Federal Reserve System issued guidelines to assist its examiners in identifying highly leveraged bank financing that could warrant closer scrutiny; (5) thrift investments in high-yield bonds grew from less than $6 billion in 1985 to over $13 billion in September 1988; (6) 10 thrifts held about 76 percent of the total bond investment, with an average bond-to-total asset ratio ranging from 3.8 to 32.2 percent; (7) federal regulations limited thrifts' high-yield bond investment to no more than 11 percent of their assets, although six states had laws that allowed thrifts to invest higher percentages; (8) studies have indicated that thrifts' investments in high-yield bonds have provided high returns but also some bank management problems; and (9) the Federal Home Loan Bank Board issued bond purchasing and management guidelines for federally insured thrifts.