Warning To Yield Chasers: Beware Junk Bonds!

SlowLane

But junk bonds are extremely overvalued, according to Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors. In fact, in his latest article on LCD News, a division of S&P Global Market Intelligence, Fridson calls the high-yield market “nearly as overvalued as it has been at any point since the Dec. 31, 1996 introduction of option-adjusted spread (OAS) data on the BofA Merrill Lynch US High Yield Index.”

http://blogs.barrons.com/incomeinvesting/2017/02/23/warning-to-yield-chasers-beware-junk-bonds/

Junk is up 23% in the past year:
https://ycharts.com/indicators/us_high_yield_master_ii_total_return_index_value

Junkster

I literally was about to post this very link with some caustic comments. Like do financial writers ever get it right?? Saying HYG and JNK are up roughly 13% the past year is so out of touch with reality - the reality being they are up (before today) 19.07% and 21.02% respectively. With junk bonds you look at total return (including dividends) NOT just price!!! As for Marty Fridson, what else is news? He has been warning of the overvaluation in junk bonds seemingly the past 12 months along with a bevy of other experts. Junk bonds ARE overvalued but so far the market seems not to care. They are due for a correction, maybe a very imminent correction. From being top heavy in bank loans coming into the year now 100% in junk bonds - IVHIX and MNHYX. As usual always on a short leash. At this point in my financial life want as little drawdown as possible. When you have won the game quit playing seems to be the buzz phrase with a lot of older investors ( 70 years+) thanks to the relentless bull of the past 8 years. I certainly concur!

Edmond

I confess to being a "half-glass-empty" investor. --- So like the late, great Dr. Martin Zweig, I find myself "worried" (and am always "worried")...

The link below is to a chart I watch from time-to-time..

https://fred.stlouisfed.org/series/BAMLH0A0HYM2

Tight spreads imply business optimism is (largely) discounted. Can the spread tighen (i.e. support to junk prices) yet further? Sure. But how much optimism is left to be discovered by the capital markets?

The thing is, junk-debt as an asset class is a 'risk-on' asset. If (when) it loses a bid, its very likely that equities will come under pressure too. The old saw goes : "the only thing that goes up in a bear market is correllation." So if one is skiddish about junk's prospects, one should also have a wary eye on equities...

hank

Excellent post @Edmond

(Zweig was a class act.)

TSP_Transfer

Hotchkis & Wiley High Yield I HWHIX February 2017
Portfolio Manager Ray Kennedy discussed the factors driving our view of the high yield market as well as top reasons to invest in high yield in 2017. The following summarizes his discussion:
Fundamentals appear positive ..
...high yield market has grown to $2 trillion with increasing liquidity
..near-term refinancing requirements are manageable for the borrower.
..issuance was lower in 2016 and may be subdued in 2017 as companies reduce
leverage.
..risk profile of the high yield market is lower as fewer CCC rated credits, as a percent of total new issuance, have been issued since the financial crisis.
investment in high yield securities invested since the high yield index’s inception in September 1986 ..would be worth.significantly more than other fixed income investments.*through 12/31/2016
http://www.hwcm.com/assets/documents/Marketing-Pieces/HY-Conf-Call/HW-High-Yield-Strategy-Feb-2017-Webinar-Recap.pdf



Henderson High Yield Opportunities Fund Class A Shares HYOAX
Jan 31 Monthly comments continue to note demand based on low Global Gov't bond yields, sees levered loan valuations a bit stretched.
https://az768132.vo.msecnd.net/documents/22438_2017_02_17_08_42_37_440.gzip.pdf

Old_Joe

@hank- Yes, for sure.