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As investors continue to plough money into junk bonds, the average yield across the high yield bond market has fallen to 5.002%, according to a benchmark Bank of America Merrill Lynch index.
This could spell trouble for the broader bond market. Because the last time average junk bond yields slipped below 5.00%, interest rates started soaring and bonds of all stripes experienced sharp price losses.
Last year’s spike in rates was largely caused by then-Fed Chairman Ben Bernanke hinting that the Fed might soon wind down its bond-buying program. Lately people have been waiting for rates to rise based on improving economic data and expectations that the Fed will start raising short-term rates sometime next year, but instead rates have fallen throughout 2014 and remain anchored by ultra-low bond yields abroad.
In the end it turned out OK for junk bonds, which have returned 5.16% so far this year. Junk bonds now yield just 3.5 percentage points more than comparable Treasury bonds, and trade at an average price of 105.7 cents on the dollar, still below the record 107-cent level set 13 months ago.
The big question remains however, are junk bonds so overvalued that they pose an imminent threat to investors, or is high yield just one of any number of Fed-inflated markets that could remain overvalued for a while yet without collapsing.
Jack Otter and Michael Aneiro discuss the state of the junk-bond market and offer some alternative options for those who think junk bonds look a little too rich.
Todays Other Top Stories
LearnBonds: – Dow Dividends – Is American Express worth the price? – Lawrence Meyers takes a closer look at American Express (AXP), the financial services company that does a lot more than just issue charge cards.
Businessweek: – Chicago pension rescue targets $9.4 billion deficit. – Chicago moved forward in its effort to rescue a pair of pension funds and stabilize its finances when Illinois Governor Pat Quinn signed a bill that cuts benefits and makes employees pay more for retirement.
Investment News: – Bond rally means now is the time to reevaluate muni holdings. – In early 2013, we urged investors to take a hard look at the interest-rate risk in their bond portfolios. If they didn’t do it then, they have a chance to do it now.
Veooz: – Who owns the U.S. bond market? – U.S. corporate bond market ownership across investor types.
Chris Puplava: – Market strength continues to build as laggards become leaders. – The biggest sectors of the market were laggards in the first part of the year, but are now displaying the greatest strength.
MoneyBeat: – If euro-zone yields don’t start rising, panic. – When the U.S. Federal Reserve said it was to pump trillions of dollars into the U.S. economy via its quantitative easing schemes between 2008 and 2012, key long-dated Treasury bond yields rose. When Mario Draghi unveiled a suite of stimulus measures last week in a bid to foster the euro zone recovery and stem deflation, bond yields initially fell. If that continues to be the case, it could be a worrying sign for the single currency’s prospects.
WSJ: – As bond markets twist, investors shout. – Some Spanish government bond yields dipped below U.S. Treasurys, adding another twist to a year of surprises for the world’s bond markets.
WSJ: – Companies choose more Treasurys, less everything else. – The proportion of corporate cash allocated to Treasury bonds grew last month as every other asset type’s share declined. Treasury bonds made up 26.6% of corporate cash as June began, compared with 24.8% a month before, according to data from Clearwater Analytics.
Investment Grade Bonds
Donald van Deventer: – Oracle Corporation bonds: Too much good news from the bond Market. – Oracle credit spreads are also low relative to sector peers and investment grade peers which traded heavily on June 6. Because of these facts and the Oracle brand, Oracle bonds have been bid up so high that the reward to risk ratio ranks below 195 other bonds on June 6.
High Yield Bonds
Citywire: – Investec’s Stopford reduces ‘vulnerable’ high yield bonds. – Investec Asset Management’s John Stopford is cutting his exposure to high yield bonds over fears the market is illiquid and fully priced.
Citywire: – China and the Fed biggest risks to frontier markets. – A Chinese growth slowdown and US monetary policy are the biggest risk factors for frontier markets, according to ING IM’s Marco Ruijer.
Pensions and Investments: – Pension funds eye illiquid catastrophe bonds. – Significant demand for insurance-linked securities, in particular catastrophe bonds, has driven down yields and taken some of the luster off the once-shining beacons of uncorrelated assets in a pension fund’s investment portfolio.
ETF Trends: – Stock, bond ETF investors should go global. – With the proliferation of exchange traded fund options available, financial advisors and investors can easily access global markets to diversify their portfolios.
Businessweek: – Wall Street’s bond contrarians lose out as market rallies. – Wall Street’s top bond traders get paid millions of dollars a year to outsmart the masses. They’re not earning their pay so far this year.
Fox Business: – ETFs that investors should have in their portfolios. – Not so long ago, in 1993, the exchange-traded fund, or ETF, made its debut in the U.S. It was a puny new runt on the investing block, staring up at the behemoth known as the mutual fund.
Morningstar: – Where bond managers are finding value. – In an environment of low growth in Europe, low interest rates and low inflation, fund managers have to utilise all the tools at their disposal to secure returns.
ETF Trends: – Alluring bond ETFs. – Fixed income exchange traded funds are not the biggest slice of the exchange traded funds universe, but even with U.S. equities solid through much of 2014, bond funds have been prolific asset gatherers.
MoneyBeat: – Mutual fund flows slow to a trickle in May. – Mom and pop haven’t joined the stock market’s latest ride to record highs. Mutual-fund investors pulled money from U.S. stocks during the two weeks ended June 4, according to fund-tracker Lipper. That marks the first two-week period of outflows this year. In that time, the S&P 500 gained 2.1% and hit six all-time highs.
Gross: Goldman expects “no drastic change” in New Neutral FF, by polling Blue Chip forecasters. Hmmm, game on Goldman.
— PIMCO (@PIMCO) June 10, 2014
5s10s down to 93bps, just about at multi year lows
— David Schawel (@DavidSchawel) June 10, 2014
plenty of demand for 30-50 yr debt — but we opt not to issue it with rates at these low levels? too bad for taxpayers.
— Bob Brinker (@BobBrinker) June 10, 2014