Displaying items by tag: junk bonds

(New York)

Credit rating agency Moody’s has just put out a broad and scary warning to investors: when the economy turns around, we have may have a junk bond crisis on our hands. Moody’s says that there will be widespread junk bond defaults in the next recession stemming from huge issuance and heavy indebtedness. With rates so low following the Crisis, indebted companies issued hugely risky and burdensome debt that was eagerly gobbled up by investors. According to Moody’s “The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives”.

FINSUM: All that issuance was always going to come back to bite. Credit-worthiness was low and investors gave up a lot of safeguards. It seems inevitable the bill will come due.

(New York)

Something very interesting is going on in the junk bond market—things are good. The market for risky corporate debt has seen a resurgence over the last couple of months, and even as benchmark yields have risen, returns for junk bonds have been positive. The spread between high yield and benchmark Treasuries has shrunk from 369 basis points to just 333 basis points since February 9th.

FINSUM: This is a very important move as it it is a positive sign about the business cycle. Junk bonds and other credits have often been leading indicators, and the fact that investors are still showing faith in them is very positive.

(New York)

The bond market is in flux. It is caught between several strong opposing forces. On the one hand, the Fed looks intent to raise rates. On the other, many are worried about a recession. Finally, the huge and increasing crop of retirees need reliable income. With that in mind, here are some potentially good bond buys from Pimco. The fund manager doesn’t think we will have a recession soon, saying “We think the [economic] cycle will continue for the next couple of years, but stocks aren’t cheap and bonds aren’t cheap”. Pimco suggests looking at high quality junk bonds, and the short end of the Treasury yield curve (e.g. 2-years, which are yielding over 2%).

FINSUM: High quality junk is still yielding over 5%, while the short-end of Treasuries also looks appealing. We don’t think there is a reason to flood out of bonds yet.

(New York)

So far all the attention of the selloff has been confined to two major areas: Treasury bonds, and to a greater extent, equity markets. Treasuries have stabilized a bit given all the turmoil in equities, but one of the areas investor need to watch carefully is junk bonds. The more equity-like bonds have been holding up well, but finally started to crack this week as outflows have been strong and the main junk bond ETF had its worst day in a year. The spread to Treasuries is still historically low—346 basis points—which means that there is a lot of room for a correction, though Bloomberg says this is giving fund managers some comfort.

FINSUM: If equities keep falling it seems like junk will fall some. However, the protection of yield, and the fact that earnings and credit worthiness are good should be supportive.