The impact of falling oil prices on the high-yield bond market, has been well documented this week. But while some investors see defaults and bankruptcy others are looking to profit from the move.
Energy companies, which reportedly make up 18 percent of the bond market, took out about $350 billion in debt to build out fracking and fracking infrastructure.
To see a list of high yielding CDs go here.
“It’s a big issue because obviously as oil prices drop, their ability to generate free cash flow is challenged, so a lot of these bond prices have been dropping fairly dramatically,” Jim Casey, global head of debt capital markets at JPMorgan, said in an interview with “Squawk on the Street.”
With that free cash flow challenged, some firms could find it difficult to fund exploration and sustain production growth.
However, distressed hedge funds are looking at this as a “huge opportunity,” Casey said. “Everyone is focused on this.”
While some have started to get in on the trade, “a lot of them are looking at this as a falling knife situation, and they are looking for some degree of stability.
Casey also said that those who think what’s happening in the high-yield bond market today is similar to the telecoms bubble of the 1990s are mistaken.
“There are hard assets here. So comparing oil and gas in the ground to fiber buried in the ground, those are two different things. And oil and gas is always going to have some value at some price,” he said.
As for how the energy debt is affecting the rest of the high-yield market, Casey said there hasn’t been too much of a “bleed out” of the market.
“I think what’s happening is we’re going through a repricing mechanism that will have its own cycle and take place, and eventually we’ll have buyers at a price.”
Overall, he called the high-yield bond market healthy and noted that while retail investors have pulled out about $13.5 billion, institutional investors are staying in.
“We think the institutional money has got it right,” Casey said, pointing out that those who bought during the last selloff, in May 2013, would have seen a return of around 14 percent.
Todays Other Top Stories
Learn Bonds: – Is there value in bonds today? – we seldom hear the word value uttered in conjunction with the fixed-income market given historically low coupon rates. However, while the light at the end of the “ZIRP (zero interest rate) tunnel” finally seems to be seen, bond investors have exhibited renewed buy pressure this year, somewhat surprisingly driving longer-term rates significantly lower.
Forbes: – Bonds are boring, right? – Bonds, particularly U.S. Treasurys, are supposed to be slow and steady investments. U.S. Treasurys are viewed as a safe, and perhaps boring, fixed-income investment option used for producing steady income and portfolio “ballast” during times of market volatility in other asset classes.
Bloomberg: – What’s Worse: Big banks or bondholders shaking markets? – Banks may have gotten safer since the 2008 credit crisis, but risk is migrating to bond buyers.
Bloomberg: – Houston stadium debt backfire spurs restructuring. – The agency that financed stadiums for three of Houston’s professional sports teams is selling debt to extricate itself from municipal-bond deals that backfired with the financial crisis.
Bloomberg: – New Jersey Sells $525 Million of Bonds to Bank of America. – New Jersey sold $525 million of tax-free debt to Bank of America Merrill Lynch, in its first issue of general-obligation bonds in 19 months.
ETF Trends: – Muni ETFs could maintain strength going into 2015. – The stubbornly low interest rate environment has helped bond exchange traded funds some of the most attractive investments this year. However, with most areas of the fixed-income market fully priced, ETF investors may seek out opportunities in municipal and junk-rated debt.
Russell Investments: –10 reasons muni bonds have the potential to hold strong value for taxable investors. – From October 1, 2013 to September 31, 2014, the Barclays Municipal Bond Index returned 1.16% more than the Barclays U.S. Corporate Investment Grade Index from an absolute return perspective, a notable amount considering the current low interest rate environment. On an after-tax basis, the difference is even greater. Today, however, the ratio of municipal bond yields to corporate bond yields is more normal, making tax-exempt municipal bonds appear less attractive to typical tax exempt investors.
WSJ: – More investors bullish on U.S. government bonds. – A gauge of views on U.S. government bonds has turned positive for the first time in eight months, a sign that more investors are becoming bullish on the $12.3 trillion Treasury market amid faltering global growth.
CNBC: – 10-year yield could dip under 2%: BlackRock’s Fink. – BlackRock Chairman and CEO Larry Fink told CNBC on Wednesday he sees bond yields under pressure in the short term as stocks motor ahead.
IFR: – Amazon pays up to price US$6bn of bonds. – Amazon paid up to triple the size of its outstanding bonds on Tuesday, issuing US$6bn of securities at levels that didn’t budge from initial price thoughts and offered investors about 15bp of new issue concession.
High Yield Bonds
ETF Trends: – An active ETF approach to junk bonds. – The speculative-grade bond market is notoriously known for its illiquid nature. Consequently, fixed-income investors seeking to generate some extra yields through junk bond exchange traded funds may consider active options with managers monitoring the underlying market.
ETF Trends: – Another benefit of lower duration junk ETFs: Less energy exposure. – Oil’s fall has been predictably problematic for a plethora of futures- and equity-based exchange traded funds. Pressure on the oil patch is also translating to elevated concerns about defaults among energy sector issuers in the high-yield bond market.
Bloomberg: – Emerging market distressed debt loses most since 2008. – Losses in emerging market distressed debt have mounted to the worst since the global financial crisis led by Indonesian coal miner PT Bumi Resources and ZAO Russian Standard Bank.
Reuters: – Emerging market debt trading volume up to $1.454 trln in Q3. – Trading volumes of emerging market debt rose 15 percent in the third quarter of 2014 versus the same period a year ago, a survey showed on Tuesday.
Insurance Journal: – A.M. best report: Last resort insurers welcome catastrophe bond market. – The convergence market has provided an opportunity for entities that act as insurers of last resort to transfer some of their peak exposures to the capital markets, according to a Best’s Special Report titled, “Last Resort Insurers Welcome Relief From Growing Catastrophe Bond Market.”
ETF Trends: – How 30-somethings can put bonds to work. – In a recent Blog post, I revealed how Millennials may want to think about fixed income in their portfolios. Bonds can play an important role in managing portfolio risk, even if you have a long investment time horizon. What’s more, bonds aren’t just for people in retirement or Millennials; they can be incredibly useful for other life stages as well.
Zero Hedge: – The name is bond, long bond. – In the following analysis, we’ll look at 5 reasons why the long bond might be the best trade of next year.
FT: – Asset managers cut oil debt exposure. – Big bond investors are cutting their exposure to energy companies in the $1.3tn US market for junk-rated debt as the year ends with little sign of oil prices stabilising.
InvestorPlace: – What to do if bond yields fall rather than rise. – Some experts expect bond prices to rise on deflationary pressure, but what happens if they fall?
Bloomberg: – Pimco Total Return withdrawals slow to $9.5 billion. – Pacific Investment Management Co.’s biggest mutual fund suffered $9.5 billion in withdrawals in November, the second full month after the surprise departure of former manager Bill Gross.
Businessweek: – Fall of the bond king: How Gross lost empire as Pimco cracked. – An inside look at the final days of Bill Gross’s reign at bond giant Pimco.
Morningstar: – What kinds of ETFs are making capital gains distributions this year? – A look at the exchange-traded funds and providers that have announced projected capital gains distributions thus far.
ETF Trends: – Listening to what junk bond ETFs have to say. – Some market observers believe high-yield bonds and the related exchange traded funds have the ability to be an important indicator for the equities market.
bond bulls left to do some head scratching after today’s weak data with no bounce in bonds – at least not yet, back too very flat too
— Peter Tchir (@TFMkts) December 3, 2014
2 year sovereign bonds In Germany, Switzerland, France, the Netherlands, Austria and Japan have negative yields. — Douglas Kass (@DougKass) December 3, 2014
“the macro problem for Puerto Rico’s bond investors remains unchanged—too much debt and a contracting economy.” -Janney
— Bob Brinker (@BobBrinker) December 3, 2014
Sign-up here to get the Best of the Bond Market delivered to your email each day.