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U.S. Junk Bond Yield Drops Below 5% for First Time
Often this creates an opportunity for capital appreciation for older HY bond notes that pay a higher yield. Mutual funds with longer duration HY bonds should see capital appreciation as yields of new issues provide lower yields. A search for a well run HY bond fund with longer durations might be worthwhile.
USHYX, AOPIX, FAGIX seems to have good performance track records.
HY is overpriced. The FT article today is even more direct. You have a record number of CCC issuers coming to the market at yields below 7% (S&P assigns CCC to a company with a 50% chance of default). Pure supply and demand. There is a huge demand for yield and quality suffers as a result.
Bee, this doesn't create opportunity because Reuters wrote about it. The prices have already adjusted on older issues for yields to be comparable with the new ones -- they all trade above par.
we can only hope that our HY fund managers don't stretch for yield too much by going junkier and junkier. FT calls this 'dash for trash'.
The more scary thought from this house is the amount of issue (to the best of my understanding) from the private equity sector to buy whatever. Too much of everything; from junk issues to central banks. This overloaded boat will eventually sink. Thinking I'll just grow another garden and get the canning jars out of storage. At least it is an area we can control, to a point.
The opportunity exists in the fact that higher yielding (often older issued HY debt) will appreciate as lower yielding issues come to market and compete for investor dollars. This is what many investors miss. A lowering of interest rates often times creates the opportunity for capital appreciation on older issued, higher yielding bonds. I might add that these older HY bonds may possess less deflaut risk as well. A good mananger is key here.
With that said, the risk premium of HY bonds are becoming more and more compressed and as you mention...more and more risky...in the end something has to give.
Reply to @bee: "The opportunity exists in the fact that higher yielding (often older issued HY debt) will appreciate as lower yielding issues come to market and compete for investor dollars. " That's exactly to which i responded. this has happened already; it's not a future state. older (better) issues are trading @ 107 - 108 to reflect the yield equal to today's new issues that coming to market at par (100).
Hi scott- Well, faced with "Great Depression II", the Bernanke Fed made a tactical decision to go in a certain direction, as you well know. So far, based on a comparison of austerity vs Bernanke, he seems to have made the better choice, or perhaps the "least of two evils" choice.
No free lunch here... someone's going to come out on the short end, and it's us: the "savers". It's frequently been observed that life isn't fair. True enough, but with respect to the efforts to save the US economy from total disaster, a little nearsighted. I'd rather be an unappreciated saver in the US than an unappreciated worker in a Bangladesh sewing factory.
Nobody is great at market timing but this seems like a sell signal similat to Nasdaq 5000 with the accomanying PE of as I recall over 80. You may be early as were the people who got out of tech in the summer of 99 but its hard to imagine you will be very wrong.
Granted if you're reducing credit quality then your risk of loss is going up, but I don't see why those who have been investing in a consistent quality of junk since the beginning of the financial crisis should feel compelled to get out now. What would you buy with the proceeds? -Cash and safer bonds are being devalued like crazy: no risk because losses are guaranteed. -Risk of loss in equities is even higher.
I say if you want/need yield (and you should want some...very bad idea to be relying entirely on capital gains in an age where flash crashes have become routine) just hold the junk and hope interest rates have risen by the time it matures. I'm personally taking a three way barbell approach: growthy equities combined with the highest yielding junk available and a garden in case the bankers manage to actually sink this Titanic.
Comments
USHYX, AOPIX, FAGIX seems to have good performance track records.
Bee, this doesn't create opportunity because Reuters wrote about it. The prices have already adjusted on older issues for yields to be comparable with the new ones -- they all trade above par.
we can only hope that our HY fund managers don't stretch for yield too much by going junkier and junkier. FT calls this 'dash for trash'.
best, jr
Thinking I'll just grow another garden and get the canning jars out of storage. At least it is an area we can control, to a point.
The opportunity exists in the fact that higher yielding (often older issued HY debt) will appreciate as lower yielding issues come to market and compete for investor dollars. This is what many investors miss. A lowering of interest rates often times creates the opportunity for capital appreciation on older issued, higher yielding bonds. I might add that these older HY bonds may possess less deflaut risk as well. A good mananger is key here.
With that said, the risk premium of HY bonds are becoming more and more compressed and as you mention...more and more risky...in the end something has to give.
No free lunch here... someone's going to come out on the short end, and it's us: the "savers". It's frequently been observed that life isn't fair. True enough, but with respect to the efforts to save the US economy from total disaster, a little nearsighted. I'd rather be an unappreciated saver in the US than an unappreciated worker in a Bangladesh sewing factory.
-Cash and safer bonds are being devalued like crazy: no risk because losses are guaranteed.
-Risk of loss in equities is even higher.
I say if you want/need yield (and you should want some...very bad idea to be relying entirely on capital gains in an age where flash crashes have become routine) just hold the junk and hope interest rates have risen by the time it matures. I'm personally taking a three way barbell approach: growthy equities combined with the highest yielding junk available and a garden in case the bankers manage to actually sink this Titanic.