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Junk Bonds: Never Stodgy And Steadier Than You Might Think
Interesting link, Ted, thanks for it. I'm curious what some of the many saavy bond investors here think about current junk valuations, @junkster and @dex maybe?
Interesting question and one that I have explored myself in looking for an answer. I am not sure my findings will fully answerer your question but I'll share my discovery. To begin, I looked at what an index bond fund's weighted price was and found it to be around 108. To me, this suggest the index is selling at about an eight percent premium over par. Then I looked to see what the average weighted price was in my income sleeve of my portfolio and found it's average weighted price for the bond funds that it holds to be about 95. With this, I took it that the bonds held in the funds found in my income sleeve were priced, on average, at about 5% below their par value.
This amounts to about a 13 point spread between the index and the bonds found in my income sleeve. And, with this, I am thinking, some upward price appreciation might be expected. Naturally, there are some influences and factors that I did not mention that will effect bond prices. However, this was my down and dirty quick look. The return, five percent price appreciation if held to mauturity plus interest.
Perhaps, the above information might be helpful in you finding an answer, you seek, to the question.
For me, I think, I found mine. ________________________________________________________________________________________________________________
Additional comment: In addition, I found that the index fund I used as my proxy to have an average maturity of 7.6 years with a duration reading of 5.4 years while my income sleeve has an average maturity of 4.8 years with a duration reading of 2.9 years. With this, I am thinking there is more downside risk for the index over my income sleeve in a rising interest rate environment. Please note, not all the funds contained within my income sleeve have great exposure to junk bonds although some representation to the sector can be found in most of them. For information purposes their ticker symbols are as follows: GIFAX, LALDX, LBNDX, NEFZX, THIFX and TSIAX.
In doing further asset type correlation / decorrelation research, I was very surprised to see FAGIX outperform everything else the last decade. (Not a pure junk fund, true.)
Corporate junk bonds continue to follow oil. Defaults in the energy and mining sectors will be much higher than 5%. I've seen estimates of 50% default rate for oil junk bonds.
Interesting link, Ted, thanks for it. I'm curious what some of the many saavy bond investors here think about current junk valuations, @junkster and @dex maybe?
Not an investor but the "experts" are all over the ball park when it comes to the prospects of the junk bond market. In Ted's linked and bullish article we see this comment Payson Swaffield, chief income investment officer at Eaton Vance, thinks we are at the beginning of a new cycle of positive junk returns that could last a few years. Yet, in this week's Barrons we see an interview with Michael Weilheimer, head of Eaton Vance's Income Fund who is cautious and thinks we will be rangebound and are anywhere from the 6th to 9th inning of the credit cycle. Same firm yet two entirely different opinions on junk bonds. Marty Fridson the junk bond guru says ex oil we are an extreme valuations in the junk bond market. And of course we all know the Bond King's (Gundlach) constant and continual bearishness on the junk bond market.
The market though, who never listens to the experts has been very bullish and the average open end junk fund is up 3.62% YTD with many up over 5%. So unless oil goes back to $30 it is looking more and more like double digits gains for 2016 will be achieved.
Edit Ted's linked article was a good one as it highlighted the dampened volatility of junk bonds.
Interesting link, Ted, thanks for it. I'm curious what some of the many saavy bond investors here think about current junk valuations, @junkster and @dex maybe?
@expatsp I think Dex was driven away by trolls on this site. I haven't seen a post of his in a while.
Junk bonds have a high correlation with stocks. And that makes sense negative news about the health of company puts in doubt the ability of that company to pay interest and pay off the debt. My thoughts that are not all mine (some are from Dex) are that the environment for bonds will be positive for longer time then most would consider.
Inflation fear have not materialized - not with all the FEDs actions and not with oil over $100. The classical causes of inflation - low unemployment, high factory utilization, high material costs - have been blunted by job offshoring and easy capitol movement. Workers wages are flat and benefits are down, that causes poorer workers who are afraid. Not an environment for inflation. The retiring baby boomers will be looking for interest and high yield bonds of any type to fulfill their needs. And I think as others here have said that there will be a VAT in this country. That will put another damper on economic activity and keep inflation low. GDP growth is in the 2% range. There is nothing on the horizon that will change that. Then consider automation/robotics and artificial intelligence and workers wages and the number of workers will be negatively impacted. Nothing is telling me that high yield bonds are in jeopardy.
@Old_Skeet@Junkster@DanHardy thanks for your thoughts. I don't have the time or courage to trade much, and I've got a long-term horizon, so I've been thinking of dipping my toes in an active fund like ARTFX...
Comments
Interesting question and one that I have explored myself in looking for an answer. I am not sure my findings will fully answerer your question but I'll share my discovery. To begin, I looked at what an index bond fund's weighted price was and found it to be around 108. To me, this suggest the index is selling at about an eight percent premium over par. Then I looked to see what the average weighted price was in my income sleeve of my portfolio and found it's average weighted price for the bond funds that it holds to be about 95. With this, I took it that the bonds held in the funds found in my income sleeve were priced, on average, at about 5% below their par value.
This amounts to about a 13 point spread between the index and the bonds found in my income sleeve. And, with this, I am thinking, some upward price appreciation might be expected. Naturally, there are some influences and factors that I did not mention that will effect bond prices. However, this was my down and dirty quick look. The return, five percent price appreciation if held to mauturity plus interest.
Perhaps, the above information might be helpful in you finding an answer, you seek, to the question.
For me, I think, I found mine.
________________________________________________________________________________________________________________
Additional comment: In addition, I found that the index fund I used as my proxy to have an average maturity of 7.6 years with a duration reading of 5.4 years while my income sleeve has an average maturity of 4.8 years with a duration reading of 2.9 years. With this, I am thinking there is more downside risk for the index over my income sleeve in a rising interest rate environment. Please note, not all the funds contained within my income sleeve have great exposure to junk bonds although some representation to the sector can be found in most of them. For information purposes their ticker symbols are as follows: GIFAX, LALDX, LBNDX, NEFZX, THIFX and TSIAX.
The market though, who never listens to the experts has been very bullish and the average open end junk fund is up 3.62% YTD with many up over 5%. So unless oil goes back to $30 it is looking more and more like double digits gains for 2016 will be achieved.
Edit Ted's linked article was a good one as it highlighted the dampened volatility of junk bonds.
Junk bonds have a high correlation with stocks. And that makes sense negative news about the health of company puts in doubt the ability of that company to pay interest and pay off the debt. My thoughts that are not all mine (some are from Dex) are that the environment for bonds will be positive for longer time then most would consider.
Inflation fear have not materialized - not with all the FEDs actions and not with oil over $100. The classical causes of inflation - low unemployment, high factory utilization, high material costs - have been blunted by job offshoring and easy capitol movement. Workers wages are flat and benefits are down, that causes poorer workers who are afraid. Not an environment for inflation. The retiring baby boomers will be looking for interest and high yield bonds of any type to fulfill their needs. And I think as others here have said that there will be a VAT in this country. That will put another damper on economic activity and keep inflation low. GDP growth is in the 2% range. There is nothing on the horizon that will change that. Then consider automation/robotics and artificial intelligence and workers wages and the number of workers will be negatively impacted. Nothing is telling me that high yield bonds are in jeopardy.