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The junk-bond market has started the year with fire in its belly, climbing by 1.95% in 2014, with the average yield falling to 5.37%, per a benchmark Bank of America Merrill Lynch index. But Barron’s Michael Aneiro writes that Junk bonds are getting expensive again.
Aneiro says that the average junk-bond price has climbed to 104.3 cents on the dollar, still below last May’s 107.2-cent record but above the 103-cent level at which many bonds can be called by their issuers.
There are problems with junk bonds going much higher according to Peter Tchir of TF Market Advisors. Tchir, a well known bond analyst, cites an average price of 107.5 cents bonds within the HYG ETF, saying that price will naturally gravitate toward par as those bonds near maturity.
He went on to say that “longer-dated junk bonds have a lot of interest rate risk, and on “risk off” days, junk bond spreads have been widening faster than treasury yields have declined.”
“There remains value in the high yield space, but you really need to be in lower rated credits, or smaller, more esoteric issues,” Tchir writes. “Some mutual funds do a great job in that space so you have to find them, because at these levels, high yield just doesn’t offer much upside other than the coupon. And if you want coupon, go to loans.”
Todays Other Top Stories
Bloomberg: – SEC proposes stricter rules on brokers. – U.S. securities regulators proposed stricter rules on brokers in the $3.7 trillion municipal-debt market designed to prevent investors from being shortchanged when trading state and local government bonds.
Barron’s: – Muni-bond fund inflows strengthen. – Flows into municipal-bond mutual funds and ETFs – a convenient barometer for investor sentiment about the muni market – strengthened in the latest week.
Credit Bubble Stocks: – Review of the fundamentals of municipal bonds. – Speaking of munis recently, The Fundamentals of Municipal Bonds, 5th Edition is a good primer on them. I was interested in seeing the statistics; how the amount and type of outstanding bonds and issuance has varied over time.
Bloomberg: – Tax-exempt debt bests rally with supply at 2011 low. – The municipal market is beating a broader U.S. fixed-income rally as states and cities borrow at the slowest rate since 2011. If history is any guide, March will bring a reversal.
Moody’s: – Bankrupt California cities face steep climb to solvency without pension relief. – If the two California cities currently in bankruptcy, Stockton and San Bernardino, exit bankruptcy without overhauling their pension liabilities, the burden of these rising obligations will challenge their recoveries after bankruptcy.
Bloomberg: – Detroit files plan to resolve $18 billion bankruptcy. – Detroit filed a proposal to reduce its $18 billion debt load and exit court supervision, starting what may be the most contentious phase of the biggest-ever U.S. municipal bankruptcy as general-obligation bondholders face a recovery of 20 percent.
FT: – Bondholders hit in Detroit restructuring. – Detroit is putting pension funds ahead of bondholders in a proposed restructuring plan as it seeks to pay $18bn in debts and emerge from the largest municipal bankruptcy in U.S. history.
Reuters: – U.S. fund managers juggle Puerto Rico debt, redemptions and rate worries. – Municipal bond fund managers, facing heavy redemptions from funds holding unfavorable debt, have been forced to juggle their holdings to pacify moody retail investors.
Bloomberg: – Treasuries decline on wagers weather-clouded data won’t sway Fed. – Treasuries dropped for a second day amid bets that weaker-than-forecast economic data this week resulted from harsh winter weather and won’t keep the Federal Reserve from reducing bond purchases further.
Bloomberg: – Treasury yields drop from week high after home sales decline. – Treasury 10-year note yields dropped from the highest level in a week after a report showed harsh weather pushed sales of previously owned U.S. homes in January to the lowest level in more than a year.
Donald van Deventer: – Hewlett-Packard Company bonds: Measuring the cost of a brand name. – Hewlett-Packard Company has experienced considerable volatility in its default probabilities in recent years, but the large drop in default probabilities since our July 15, 2013 report is a sign of significant progress. At current default probability levels, Hewlett-Packard is in the riskier half of its peers for maturities ranging from 1 month to 1 year.
NBC: – Google $1B bond sale gets $5B in demand. – Investors want Google’s bonds. When the tech giant offered its $1 billion bond to help pay off its debts Thursday, investors wanted five times that amount.
Investment News: – Emerging markets activity shows portfolio diversification key to performance. – With all the noise over rates, the economy and stock prices, don’t ignore the basics.
What Investment: – Rathbone’s Jones: I’ve returned to emerging market bonds, but I’m still cautious. – Byrn Jones, fixed income director at Rathbone Unit Trust Management, has disclosed that he has begun investing in emerging market bonds again, but believes that investors should continue to be cautious on the asset class.
LearnBonds: – Why you should consider utility stocks for income. – Utility stocks are one way for investors to generate income through dividends. They are a relatively conservative investment option which still allows investors higher returns than many other types of investments.
WSJ: – How to prepare for Federal Reserve tapering. – Many investors worry about what will happen to interest rates and bond yields when the Federal Reserve winds down its bond-buying program. So we asked The Experts:What should investors do to prepare for the Federal Reserve tapering this year?
RGJ: – Investors show interest in convertible, high-yield bonds along with stocks. – As we review the bond market today, it’s no surprise that convertible bonds are leading the pack over the past week.
FT: – Investor support for U.S. bonds on the wane. – Bond market investors are a downbeat lot. They live in an asymmetric world because bonds can go down much more than they can go up. And investors in Treasury securities are the most downbeat and risk averse of all since they prize safety above all else.
Morningstar: – Bonds beat stocks in 2014. – It may be early days, but if this persists, we may be looking at the great “un-rotation” rather than the “great rotation” that so many speculators had predicted.
— Cate Long (@cate_long) February 21, 2014
BREAKING: Detroit files proposal to exit court supervision, starting what may be most contentious phase of record bankruptcy.
— Brian Chappatta (@BChappatta) February 21, 2014
“The Plan generally proposes to provide unsecured, non-retiree creditors with an approximately 20% recovery on their claims” – Detroit stmnt
— Brian Chappatta (@BChappatta) February 21, 2014
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