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this is easy, right? when they traded below par and at large spreads to treasuries, they traded more like risk assets and went up when equity went up. now that they are priced at record low spread to treasuries and often above par, guess what? they behave like fixed income. didn't everyone and their mother in the investment world predicted that we'll be lucky to get the coupon in 2013? i totally agree with that premise.
in our institutional porfolios we allocated our equity risk to junk during 2008-2011. since 2012, we are back to full equity weights with high yield allocation coming at the expense of core bond. something to chew on for those who still expect outsized returns from this side of their porfolio.
I've been in this battle in other forums since like forever so why not here. The charts of the junk bond ETFs ala HYG or JNK do not tell the real story because they are not total return charts and omit the most important ingredient of the junk bond markets and that is dividends. In the real world, junk bond funds have been hitting all times on a regular basis since August 2009. You would never know that looking at JNK or HYG. In fact, while the Dow and S&P have yet to take out their pre crash highs 2007/08 or for that matter the charts of JNK and HYG, in reality junk bonds have exceeded theirs (pre crash highs) by some 60%. So if anything, stocks have really lagged junk bonds.
The proxy for the junk bond market is the Merrill Lynch High Yield Master II Index and it is a total return chart. Compare that chart with JNK and HYG and it's a completely different picture.
Another example of junk bond charts. Take a gander at Vanguard's VWEHX. It was offered in December 78 or December 79 (can't recall exactly offhand) at $10. Looking at the chart you would think junk bonds are the worst investment around as the chart has been in a protracted downtrend since its offering. Yet in the real world you have have compounded your capital at around 8%+ per annum.
As for junk bonds now, not only are they overpriced, they are insanely overpriced. I would love to see a severe correction to right the ship. But as we know, insanely overpriced markets can stay that way for longer than expected, so who knows. Surely not I.
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in our institutional porfolios we allocated our equity risk to junk during 2008-2011. since 2012, we are back to full equity weights with high yield allocation coming at the expense of core bond. something to chew on for those who still expect outsized returns from this side of their porfolio.
The proxy for the junk bond market is the Merrill Lynch High Yield Master II Index and it is a total return chart. Compare that chart with JNK and HYG and it's a completely different picture.
http://research.stlouisfed.org/fred2/series/BAMLHYH0A0HYM2TRIV/
Another example of junk bond charts. Take a gander at Vanguard's VWEHX. It was offered in December 78 or December 79 (can't recall exactly offhand) at $10. Looking at the chart you would think junk bonds are the worst investment around as the chart has been in a protracted downtrend since its offering. Yet in the real world you have have compounded your capital at around 8%+ per annum.
As for junk bonds now, not only are they overpriced, they are insanely overpriced. I would love to see a severe correction to right the ship. But as we know, insanely overpriced markets can stay that way for longer than expected, so who knows. Surely not I.
http://blogs.cfainstitute.org/insideinvesting/2013/02/06/two-things-about-high-yield-bonds-investors-must-understand-today/