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High-Yield Bonds Are Now Too High-Risk For Your Money
FYI: If you think the stock market has bounced nicely, the junk bond rebound has displayed just as much vigor. From its recent low on February 11 through July 12, the Bank of America Merrill Lynch U.S. High Yield Total Return Index is up a blistering 18%. Unfortunately the margin of safety in junk bonds may have disappeared for now. Regards, Ted http://www.marketwatch.com/story/high-yield-bonds-are-now-too-high-risk-for-your-money-2016-07-22/print
Interesting, the calculations on default risk. The first one, the one he says is the historical way of looking at it, lines up well with the "sell 4" part of the old "sell at 4, buy at 8" rule of thumb for HY valuation based on spreads to Treasuries. I never knew where the 4 and 8 came from - still don't on the 8 of course.
The DoubleLine analysis of HY default risk this next time around (which Gundlach explained on at least the last two webcasts) guesstimated recovery rates possibly even lower than the 30% the article assumes.
The thirst for yield continues unabated. Today is something like the 11th day this month junk bonds have hit all time highs. About 2 weeks ago for the first time in 18 months junk bonds began ignoring oil. Curious if that will continue if oil breaks below 40. In the meantime all you can do is go with the flow.
Gas here now obtainable at $2.04--- a reflection of the cost of oil. I have an infinitesimally small position in COP. Doing nothing for me. I continue to hold it, noting how ratings of the stock's estimated high put it at anywhere between $44 (JPM) to $71 (BofA-ML). The stock is just above $40 right now. It won't kill me to be patient... Meanwhile, back at the ranch, ("it's a song about Alice, remember!") I hold no dedicated HY bond fund. My all-bond funds are: DLFNX (core-plus), PRSNX (Global multi-asset), and PREMX (EM bonds.) Let the fund Managers do their job, eh? That listing is in order, smallest to highest proportion right now in the portfolio: 2.48%, 10.87% and 14.51%. Very pleased with the solidity and low volatility of DLFNX. PRSNX became a holding on a very tardy basis, recalling a recommendation from someone on this discussion board back in 2009 or so. I've held PREMX since 2010, and it grew to be a riskier than I thought size. I've since reallocated a great deal of it. Gotta be pleased with it THIS year!
Comments
The DoubleLine analysis of HY default risk this next time around (which Gundlach explained on at least the last two webcasts) guesstimated recovery rates possibly even lower than the 30% the article assumes.