The *real* smart money is shorting junk bonds

Junkster

http://finance.yahoo.com/news/ex-goldman-trader-correctly-shorted-152002886.html

To update the above. As of Friday, the average junk bond fund per Morningstar was negative 0.24%. The Merrill Lynch High Yield Master II Index was positive 0.84%. Today's negative price action just adds to the junk bond woes. We better not hope this is a reverse of 2008/09 where junk bonds led stocks with junk bottoming in mid December and stocks early March. It's been completely different in junk munis which have been making YTD highs this month (until today in some of the funds) I am 89% in junk munis but they are on a tight rein.

JohnChisum

I have noticed that my unconstrained bond fund has slowly increased their shorting on certain instruments. Is this something that might be catching on in the fund universe?

Derf

JC : And which fund might that be ? Think I'll check mine & see if it's heading the same way.
thanks Derf

JohnChisum

ASDVX. Some of the increase is also due to the fund shorting the ten year so it's not all junk bond related.

Derf

Johnchisum thanks for reply. I took a look at your fund & Chuck shows 154 long positions & 26 short as of 9/30/14. It looks to be down 2.43 % YTD. What do you like about this newbie MF ?
Derf

JohnChisum

It's very new and the fund opened right when high yield took a sharp drop. At 8% of the portfolio I won't worry much. It took them a month just to get their assets up.

Where did you see the fund being down 2.43% YTD? I also checked it out on Schwab.

I was looking for a unconstrained bond fund and it just so happened that American Century announced this one during the same time frame. Easier for me to open. Marge Karner is not as well known as the Gundlachs or the Gross's but she has good experience with these types of investments elsewhere. She is part of a four person team running the show.

I'll give it three years at least before making any judgement.

franktrdr

Junkster said:

http://finance.yahoo.com/news/ex-goldman-trader-correctly-shorted-152002886.html

To update the above. As of Friday, the average junk bond fund per Morningstar was negative 0.24%. The Merrill Lynch High Yield Master II Index was positive 0.84%. Today's negative price action just adds to the junk bond woes. We better not hope this is a reverse of 2008/09 where junk bonds led stocks with junk bottoming in mid December and stocks early March. It's been completely different in junk munis which have been making YTD highs this month (until today in some of the funds) I am 89% in junk munis but they are on a tight rein.

Junkster, in a recent post you mentioned that junk bond funds might be setting up for a buy in the next few months. How will you judge when this buying opportunity arrives?

catch22

Hi @JohnChisum

Fido indicates a - 2.6% for "life" of the fund through 12-15-14.

Fidelity view

Take care,
Catch

clacy

Is there any decent way to short junk bonds? I know there are a couple of short high yield ETF's and mutual funds, but those seem to not track too well

clacy

Let me clarify my previous question, as I fully understand that there are ways to short junk for an institution or an ex-Goldman trader and such.

I'm just wondering if there is a reasonable way to do it for a non-finance professional.

AndyJ

Clacy: You don't like SJB? Not sure exactly how well it tracks, but it seems to be mostly positive when junk's negative, and vice versa, and it also has reasonable volume.

clacy

Andy,

At the time of writing this post, SJB is down -0.14% and JNK is down -0.65%.

That is a pretty big tracking discrepancy for two highly liquid ETF's, IMO.

I would expect a short junk bond etf to be at least in positive territory today.

SlowLane

Clacy - In addition to SJB, there are AFBIX and RYIHX.

Junkster

At least SJB tracks better than RYILX and AFBIX. I think this is something like the third time in the past 25 years Rydex (RYILX) has tried an inverse junk bond fund and all with terrible results. As for AFBIX the worst of the worst as an inverse junk fund. 2008 alone was a disaster when it was suppose to shine. I am biased against junk bond ETFs including munis, so I wouldn't touch them with a 10 ft pole - JNK, HYG, HYD. I am also biased against shorting (anything) so shorting junk is never on my radar screen. Had I shorted every time I was bearish over the years (equities or bonds) I would probably now be a pauper begging for coins with a tin cup.

I'm worried about the junk munis wondering if I should rotate some to investment munis. But will let price dictate my actions not my mood.

clacy

Junkster I get what you're saying about shorting stocks, commodities, etc that all have a long term inflationary bias built in, but ultimately being long bonds, is equivalent to being short yields, no.

Anyway, I would assume an ex-Goldman trader has a much better mechanism to short junk compared to a "muppet" like myself.

Junkster

clacy, neither here nor there but I have never been a fan of commodities - trading or investing. I was a commodity broker back in the 70s and amazed at how so many now aren't all that much higher than back then. They can't hold a candle to stocks when it comes to a long term upward bias (or for that matter corporate junk bonds)

AndyJ

clacy said:

I would expect a short junk bond etf to be at least in positive territory today.

That's one day, during which junk had a minor rally and then fell back, and the short fund didn't follow late in the day. I don't think there is an investment vehicle for us plebes that's exactly inverse, minute for minute, day for day.

The 3-month total returns - roughly matching the steeper phase of this downtrend - are -5% for HYG, -6% JNK, and +4% for SJB. I get that tracking isn't perfect for some periods, but the expected relationship does generally work.

P.S. The junk spread to T's now is higher than it's been since December '12.

AndyJ

Junkster said:

I'm worried about the junk munis wondering if I should rotate some to investment munis. But will let price dictate my actions not my mood.

Junkster, do you still own ETHYX? It's not really a junk fund anymore - more of a mid-long IG muni fund with some junk and unrated, ~ 3/4 IG. (It's been that way for a while, but just yesterday M* put out notice that they've changed the investment style box for it.)