Displaying items by tag: high yield
By any reasonable measure, high yield bond markets look very scary right now. The way that yields have plummeted, the way that covenants have weakened, and the general ease of accessing credit are all reminiscent of 2005. Spreads over Treasuries have fallen to just 300 bp. A year ago they were at 600 bp. Companies have successfully weakened investor protections in new issues without penalty, and crucially, default rates will likely fall below 1% this year. The picture was the same in 2005.
FINSUM: By the Crisis, default rates hit 14% and high yield investors got killed. However, a big correction in high yield would take a catalyst. Is it a sooner-than-expected Fed pullback?
There has been a lot of worry about bond prices recently. With inflation rising steeply and the bond market still regaining its footing, it is easy to worry about another sharp selloff. Because junk bonds are on the riskier end of the fixed income spectrum, many think there is more risk in this area. However, the opposite is true, especially in a rising economy. Because they tend to have higher yields and shorter terms, junk bonds naturally have less rate risk. Additionally, because of their underlying financials, junk bonds have a lot to gain in a rising economy. For example, they may be likely to get upgraded, and because of their relatively weak financial positioning to begin with, even minor gains can mean substantial valuation improvements.
FINSUM: If you need income, then high yield bonds are one of the best bets given their natural rate hedging and their potential for significant financial improvement.
Junk bonds have been riding the rally like many other financial sectors…see the full story on our partner Magnifi’s site
The stock market has been absolutely killed lately, but you wouldn’t know it from looking at bonds. Several high yield indexes have barely budged, despite the big worries over inflation and rates. Why? Aside from some high yield bond mechanics which make them less rate-sensitive, the answer is that investors are very excited about the sector. The market is anticipating a big wave of credit upgrades in the next year, and all investors in the space are trying to buy up the winners (who will jump in value when upgraded).
FINSUM: Earnings are doing well and there is a lot of investor demand for new high yield debt. Junk bonds look like they have a great runway for the rest of the year.
Income is both extremely desired, and very hard to achieve in today’s market. Based on the economic data which hit the morning of the 7th, it seems likely to stay that way. So where are the best places to find income? One of the first places investors think of outside of bonds is the dividend aristocrats, but the bad news is they are only yielding 1.9%. If you need more income, check out high yield bond ETFs like the SPDR Bloomberg Barclays High-Yield Bond ETF (JNK), which yields 4%. But the best bet is to look at bond closed end funds, for example the DoubleLine Income Solutions Fund run by bond legend Jeffrey Gundlach. The fund yields 7.3%.
FINSUM: Bond closed end funds are great. Many trade at a discount to their NAV and they have very nice yields.