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>>>High-Yield Bond Funds: Don’t make the mistake of focusing on interest rates and missing a potentially bigger problem for bond fund prices — credit risk. High-yield bond funds are providing great yields for investors in a low-yield environment and have also held up on the price side thus far in 2015. For example, one of the best high-yield bond funds, Fidelity Capital & Income (FAGIX[5]), is yielding 3.86% and sitting on a nice year-to-date gain of 2.5%. But when things turn south and the flight to safety hits the bond market, investors need to be prepared for stock-like declines. In 2008, in the midst of the last big downturn, FAGIX was hit with a 30% drop.<<<<
I could show you articles that say the exact opposite about high yield bond funds. Namely, that they hold up well when the Fed raises rates. As for his example of FAGIX, who is this guy??? The article is dated June 19 but the YTD return is 5.22%, a big % distance above the measly 2.5% mentioned.
This guy sounds like someone who writes about bonds, not funds. He's separated out the capital (price) appreciation (from $9.68 to $9.93) from the interest return. Look at the phrasing: it's "yielding 3.86% and sitting on a nice year-to-date [price] gain of 2.5%"
But even that is wrong. The 3.86% yield he quotes is the SEC yield that incorporates part of the price change - the portion due to market premium/discount amortization over time, but not the portion due to interest rate changes. The 2.5% price gain is a gross figure and so includes all sources of change. Thus, the amortization is being counted twice.
If he's going to separate price movement from interest payments, he should use something like trailing 30 day rate, or M*'s trailing twelve month rate, which is 3.93%.
As to the substance - junk has an equity aspect to it (if the market is improving and companies are more likely to succeed, the risk of junk defaults decreases, and so the value of junk bonds, like that of their underlying companies, goes up). So whether rising interest rates hit junk hard or not seems to depend on part on whether the market views the increase as a positive sign (companies are strong and improving), or as an impediment (companies cannot grow as easily with higher borrowing costs).
So, do we go with interest rate risk, credit risk, or both? If both, any differential weighting? If credit risk, what kind of credit risk--- below investment-grade corps, or below IG MBS, a bit of both? Not hard for a retail investor to do an incredible amount of diversification here, in ways that would have been impossible 20 yrs ago, but much harder to determine how to allocate now. Perhaps it matters far less how one does it than that one does it?
Agree that Mr. Thune must have been using a pretty funky calculator (or someone else's) when he put this piece together. Also, I understand the significance of the SEC yield number, but prefer to compare using distribution yields (even if I have to do them myself) before glancing at that one.
There is a silver lining as rates rise and bond prices fall. The newer issues will pay a higher rate of return. Unfortunately - if, as I suspect, there is a stampede of investors out of bond funds once they realize that they can lose money in these, some funds may not have the money available to reinvest in the newer higher yielding issues. That's one of the known risks of bond funds - and why some would prefer to hold bonds directly rather than through funds.
DODIX lost .36% today. That's big for this fund. These guys are pretty sharp, have been going short for a long time, and have a lot of money under management (and a pretty stable core of investors). I suspect they'll come out of this bump-up in rates just fine over the long run. Other funds that have been more aggressively positioned and received a lot of "hot" money won't fare as well.
Has it occurred to anyone the Fed seems to have hold of the markets by the *****? Their day to day gibberish re potential increases seems to be affecting equity/bond markets nearly as much as if they were to actually change the overnight lending rate. Kind of like holding a gun to someone's head to coherce them without actually pulling the trigger. ---
Comments
I could show you articles that say the exact opposite about high yield bond funds. Namely, that they hold up well when the Fed raises rates. As for his example of FAGIX, who is this guy??? The article is dated June 19 but the YTD return is 5.22%, a big % distance above the measly 2.5% mentioned.
But even that is wrong. The 3.86% yield he quotes is the SEC yield that incorporates part of the price change - the portion due to market premium/discount amortization over time, but not the portion due to interest rate changes. The 2.5% price gain is a gross figure and so includes all sources of change. Thus, the amortization is being counted twice.
If he's going to separate price movement from interest payments, he should use something like trailing 30 day rate, or M*'s trailing twelve month rate, which is 3.93%.
As to the substance - junk has an equity aspect to it (if the market is improving and companies are more likely to succeed, the risk of junk defaults decreases, and so the value of junk bonds, like that of their underlying companies, goes up). So whether rising interest rates hit junk hard or not seems to depend on part on whether the market views the increase as a positive sign (companies are strong and improving), or as an impediment (companies cannot grow as easily with higher borrowing costs).
Agree that Mr. Thune must have been using a pretty funky calculator (or someone else's) when he put this piece together. Also, I understand the significance of the SEC yield number, but prefer to compare using distribution yields (even if I have to do them myself) before glancing at that one.
DODIX lost .36% today. That's big for this fund. These guys are pretty sharp, have been going short for a long time, and have a lot of money under management (and a pretty stable core of investors). I suspect they'll come out of this bump-up in rates just fine over the long run. Other funds that have been more aggressively positioned and received a lot of "hot" money won't fare as well.
Has it occurred to anyone the Fed seems to have hold of the markets by the *****?
Their day to day gibberish re potential increases seems to be affecting equity/bond markets nearly as much as if they were to actually change the overnight lending rate. Kind of like holding a gun to someone's head to coherce them without actually pulling the trigger.
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P.S. Just read the article. Pretty awful!