Investors looking to benefit from the recent sell-off in junk bonds should heed the advice of DoubleLine Capital’s Jeffrey Gundlach, who said on Friday that the junk bond market is “not cheap” even after its recent sell-off.
Investors pulled a record $7.1 billion from U.S.-based junk bond funds last week, according to Lipper data released on Thursday.
The outflows, the biggest since Lipper records began in 1992, came as high-yield bonds delivered a negative total return of 1.42 percent in the week ended Aug. 1, their worst weekly performance in more than two years.
Gundlach went on to say: “You probably had some people who got their statements in the mail and saw that junk bond prices can go down, and said, I’m getting out now, but I don’t see a mass exodus from the junk bond market.”
The yield premium investors demand for holding low-rated bonds shot up by 0.50 percentage point to more than 4.2 percentage points above comparable U.S. Treasury debt. Just over a month ago, that spread had been as low as 3.35 percentage points, the smallest since 2007.
“I don’t see any real reason for higher rates in the U.S.,” Gundlach said. “Bonds are killing it.”
Todays Other Top Stories
LearnBonds: – High yield spreads are on the rise. – On October 4, 2011, spreads in the non-investment grade part of the corporate bond market reached a level of 910 basis points over Treasuries. If you were an investor on the prowl for so-called “junk bonds” to add to your portfolio, early October 2011 was a fantastic time to buy. Since that time, however, it slowly became more difficult to find enticing opportunities in the world of high yield bonds, as spreads have collapsed, falling all the way to 335 basis points on June 23, 2014. And then things changed.
CNBC: – SEC files securities fraud charges against state of Kansas over muni bonds and pension liabilities. – Securities regulators have filed fraud charges against the state of Kansas Monday, alleging bond offering documents failed to disclose the risks to investors from the state’s underfunded pension system.
Intelligent Investing: – Muni bond manager’s journal: Why it’s bad news for investors when bonds get a call. – In today’s environment of ultra-low interest rates, finding tax exempt income is a challenge for all investors, whether you are managing a multi-billion dollar mutual fund or your own personal account.
Bloomberg: – Minnesota boosts roads in largest sale in four years. – Minnesota is offering about $904 million in general-obligation debt tomorrow to raise money for projects from St. Cloud to Winona, in the state’s largest bond sale since 2010.
Financial News: – Safer banks make bond markets more risky. – In the offices of financial authorities worldwide, justified satisfaction at making big banks more stable is giving way to twinges of alarm that one side effect has been to make the bond market riskier.
WSJ: – U.S. Treasury bond yield hits lowest since June 2013. – Benchmark government bond yields in the world’s most advanced nations on Friday fell to fresh lows of 2014 as geopolitical worries boosted the allure of haven bonds.
Bloomberg: – War risks slow company bond sales to least since July ’13. – Risks from conflicts in the Middle East and Ukraine are combining with concerns credit markets may have become too frothy to curb corporate bond sales.
Boston.com: – A tough road ahead for corporate bonds. – Going forward, the corporate bond market will be much more closely tied to Treasury-bond returns than in the past, says Morningstar’s Dave Sekera.
Reuters: – High-grade shrugs off high-yield bond woes. – Why a company like Tyson Foods will jump through hoops to keep an investment-grade rating was made blindingly clear last week, when the high-grade new-issue market shrugged off mayhem in the junk bond market and priced almost US$23bn of deals.
High Yield Bonds
Barron’s: – High-yield bonds land in the junk pile. – High-yield bonds have been a problem waiting to happen for a long time. Risk of default is still low, but geopolitical risks, a stock-market pullback, and decreased liquidity finally caught up to the junk-bond market.
Financial Advisor: – Junk-bond selling frenzy is neutralized as Wall Street buys more. – Evidently there was a scare in the U.S. high-yield bond market this past week. Just don’t ask traders about it. They might have missed it.
4Traders: – BlackRock muni strategist Sean Carney says 50% of high-yield municipal market is Puerto Rico & tobacco bonds. – We know this year and actually, in the last couple of weeks, we saw investors chasing yield but then having a change of heart, and I’m talking specifically about high yield overall, which has seen some outflows from funds. Certainly, Puerto Rico is a high-yield municipal credit. Do you avoid high-yield muni bonds right now in addition to what we’re seeing with the overall market now adding Puerto Rico into the mix?
Quartz: – Markets are trying to kick the junk habit. – For a while now, solid fundamentals have been considered somewhat optional for global investors. US junk bonds, emerging market bonds, stocks in economically challenged European countries, and bonds issued by their heavily indebted governments all have had their day in the sun. But this week, investors seemed to decide enough was enough.
FT: – Unwary yield hunters risk liquidity trap. – High-yield bonds have had a record run. With a cumulative return of more than 150 per cent since 2009, they have beaten stocks in three out of the past six years. But the market is now stumbling, and regulators have highlighted signs of frothiness. With the end of the US Federal Reserve’s low-for-long policy in sight, investors are set for a rough ride.
Business Insider: – Some people are worried an ‘antiquated quirk’ in the bond market will lead to a wider crash. – The record selloff in corporate junk bonds last week is leading some investors to fear it may presage a wider crash in stocks. It’s not unreasonable to think that a crash of high-yield debt prices might trigger a downward spike in stock prices. But one of the reasons the junk bond market ended up so overvalued is surprising.
Pragmatic Capitalism: – The worrisome trend in junk bond issuance. – There is little doubt that the Fed’s QE programs have resulted in a “chase for yield” which has led to this environment. Those who claim the Fed doesn’t contribute to market instabilities clearly don’t interact in markets very often. The worrisome part of the junk bond market is not the valuations as much as the sheer magnitude of the issuance.
Zacks: – High yield bond ETFs see huge outflow, where to go? – High yield mutual funds and ETFs, which were popular among investors for years at a time of record-low interest rates, now appear to be losing steam. With the U.S. economy picking up at an accelerated pace of 4% in Q2 and the U.S. labor market improving, concerns over an interest rates hike sooner than expected are high. This has lowered the appeal for risky yield plays.
FT: – Rethink over emerging markets buoys ETFs. – The exchange traded funds industry made a strong start to the second half of the year after gathering net inflows of $33.8bn in July, helped by record monthly inflows in Europe and a continuing recovery in the demand for emerging markets ETFs.
Barron’s: – Russia roils emerging markets. – Food sanctions heighten investor worries, wiping out July’s gains and prompting portfolio reviews.
ETF.com: – Daily ETF Watch: Van Eck plans EM bond fund. – A new filing from Van Eck outlines its plans for an ETF that will cover the emerging market corporate bond space at a time when investors are searching for yields.
Business Wire: – Hawaiian hurricanes manageable for P/C and cat bond mkts. – Insured losses from two hurricanes that have approached Hawaii appear to be manageable, but could depress third-quarter 2014 earnings for the largest primary writers in the state, according to Fitch Ratings.
Eagle Tribune: – The search for income: Dividend-paying stocks vs. bonds. – Investors, especially retirees, often use their portfolios to generate income. With bond yields and interest rates on CDs and money markets at record lows, these investors are searching for alternatives to meet their income objectives. Spurred by the headlines in some of the popular consumer finance magazines many of them are heading down what could prove to be a perilous path, trading their bonds for dividend- paying stocks and the mutual funds that invest in them.
Great Speculations: – Positioning for today’s high-yield sell signal. – A few weeks ago I wrote about the coming default wave in the high-yield bond market and recommended a tactical strategy for that possible scenario. This may be an opportune time to put that strategy to the test. Recently the strategy flashed a sell signal when the SPDR Barclays High Yield Bond ETF (JNK) dropped below its 21 week exponential moving average, a form of smoothing the price trend line.
About.com: – The best bond ETF for the next ten years. – While most people invest in bonds for income, portfolio stability, or diversification, many investors are interested in ways to maximize the long-term total return potential of their fixed-income investments. For these investors, one market segment stands out for its ability to generate strong performance over the next decade: emerging market high yield bonds. And one bond ETF in particular, the Emerging Market High Yield Bond ETF (HYEM), is uniquely positioned to capitalize on this trend.
ETF Trends: – SEC allows PIMCO to trade derivatives in BOND ETF. – PIMCO’s exchange traded fund adaptation of the flagship Total Return Fund could soon better mirror its mutual fund counterpart as the Securities and Exchange Commission gives the go ahead for derivatives usage.
Gross: Stanley Fischer speech echoes Yellen. Two doves in a pod. Treasuries OK here heading into auctions.
— PIMCO (@PIMCO) August 11, 2014
Crescenzi: When (will) doves cry? Fed hawks get attention but core leaders are Yellen, Fischer, Dudley. Latter 2 speak this week. Listen up.
— PIMCO (@PIMCO) August 10, 2014
— Cate Long (@cate_long) August 11, 2014
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