Martin Fridson – Junk Bonds Are at an Extreme Overvaluation and Today’s Other Top Stories

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Investors in junk bonds are set to lose more than 1.5% in yields when the Fed finally begins to wind down its quantitative easing program that’s bolstered credit markets for five years, according to Martin Fridson.

Once quantitative easing ends, “the rise in long-term Treasury rates that will almost certainly result will adversely affect the total return of high-yield bonds,” Fridson said.

Fridson based his analysis on economic forecasts from William Cheney of Manulife Asset Management. Cheney, won praise for the accuracy of his projections for GDP and CPI from December 2011, when his predictions proved close to perfect.

Fridson says, “Cheney’s a good guide, because the projections of a forecaster who hits GDP and CPI on the head is a reasonably reliable indication of what the rate will be if the Fed does not change the game by instituting quantitative easing.”

Cheney forecast the 10-year note would reach 3.4% by the end of 2012, about 1.64 percentage points above where it finished the year, which indicates how much QE suppressed interest rates, according to Fridson, who started his career as a corporate debt trader in 1976. That means yields now without QE would be about 4.25%.

Fridson, who is often referred to as the ‘dean of high yield debt’, finished up by saying that,  “Tapering has been delayed, but high-yield investors should nevertheless assume that the end of quantitative easing will eventually hurt their returns.”


Todays Other Top Stories


Municipal Bonds

ValueWalk: – The key issues in today’s muni bond market. – Investing in high quality municipal bonds paying a predictable cash flow and returning your principal at the end of the investment is a well-trodden system for lifetime economic success. In this article we discuss some key issues in purchasing municipal bonds to help you make wise choices for your investing system.

Main St: – Municipal bonds offer investors unique opportunity. – Despite the fact that municipal bonds are outperforming U.S. Treasuries, investors are pulling money from municipal bond funds due to the recent federal government shutdown and rumors of city bankruptcies.

Reuters: – New Jersey bridge developer to borrow $457 million in muni market. – New Jersey’s economic development arm on Tuesday will sell $457 million of municipal bonds on behalf of the private developer designing and re-building an 85-year-old bridge between New York and New Jersey.

Income Investing: – Citi: Short-dated munis look rich, seek 6-8 yr bonds. – The muni team at Citi says it’s “time to step in from the sidelines” and buy munis, but an October rally has made some sectors rich where a month or two ago the whole market looked cheap, so be selective. In particular, select bonds maturing in 6 to 8 years rather than anything shorter than that.

Investors: – Puerto Rico: More to the story.– There’s much more to the economic story of Puerto Rico than the sensational headlines of a fiscal fiasco in this Caribbean isle. Rafael Costas, senior vice president and co-director of our municipal bond department, says Puerto Rico is “no Detroit,” and while it has been facing its share of challenges, there are positive aspects that are being ignored, including pension reform. He believes investors have unjustifiably battered Puerto Rican bonds.

MunicipalBonds.com: – Municipal Bonds This Week (11/2). – This week was mixed for markets, as earnings continued to pour in at a time when traders are trying to predict when Fed tapering will finally start. In addition to that, the S&P 500 gained 4.5% in October, and is up 23% this year, which makes profit-taking tempting for those thinking the market is nearing its top.



Learn Bonds: – Avoid this risk tolerance mistake. – Investors are not always honest with themselves about their risk tolerance. Most investors overestimate how much risk they are willing to accept. And, some even drastically underestimate their willingness to handle risks in the stock market.


Treasury Bonds

Benzinga: – Government to run budget deficits until 2038; How can money printing stop? – The stock market is certainly getting all the attention these days, but not a lot is said about other disturbing fundamentals. These fundamentals are troublesome, and if they aren’t fixed, the U.S. economy could end up in a downward spiral in a very short period of time. With these conditions, those who are saving and investing for the long term can face a significant amount of scrutiny.


Investment Grade

FT: – Debt sale rush ahead of holiday season. – Sales of investment-grade debt this week may surpass the $25bn mark as global corporations attempt to raise this year’s final batch of funds at low borrowing rates, ahead of the forthcoming holiday season, analysts said.

WSJ: – Funded status of U.S. corporate pensions rises to 91.8% in October. – Strong equity and fixed income returns in October contributed to rising assets for corporate defined benefit plans, public defined benefit plans, and endowments and foundations in the U.S., according to the BNY Mellon Investment Strategy & Solutions Group (ISSG). The funded status of the typical U.S. corporate plan rose 0.8 percentage points to 91.8 percent in October, ISSG said.


High Yield

Focus on Funds: – Is there an ‘ETF effect’ in junk bonds? Answer: Yes. – Can heavily traded exchange-traded funds force higher prices into the junk-bond market? Maybe not on their own. But it sure looks to be true of indexed bonds as a whole.

Kiplinger: – A juiced-up junk bond fund. – One of the top-performing junk funds over the past year, Northeast Investors Trust, is one of the oldest and one of the most aggressive. The fund can invest up to 20% of its assets in stocks, and it can employ leverage—that is, use borrowed money to attempt to boost returns. The fund went to a 20% leveraged position last June after big selloffs in the stock and bond markets, says co-manager Bruce Monrad. As of early October, he says, the fund is no longer leveraged, though it does have 12% of its assets in stocks.

Morningstar: – High yield not living up to the name. – In the financial world the phrase ‘High Yield’ has become an oxymoron. There’s nothing left that is high about it.


Emerging Markets

Emerging Markets Daily: – EM bond outflow, equity inflow continued in October; LatAm no One’s lover. – Emerging-market equity funds shone in October, reflecting the recent recovery in stocks from once-battered markets like India, Turkey and Brazil.

MoneyBeat: – Emerging-market equity funds make a comeback in October. – Tapering uncertainty led to a difficult summer for global bond markets, especially emerging market debt which saw significant falls over the period. The fixed income exposure we have is to more esoteric credit markets, such as junior debt and convertible bonds. With rates rising, convertible bonds are firmly back on the issuance menu for CEOs, and the pipeline is rumoured to be substantial. New issuance is good as it expands the universe and creates new investment opportunities.

South China Morning Post: – Investors step up inflows into emerging market funds. – Emerging market bond funds will see inflows accelerate until the end of the year as investors shift more money into the asset class on expectations the US Federal Reserve will keep stimulus measures in place for longer.

Washington Post: – Emerging markets think the Fed is causing bubbles. – The Fed disagrees! – Go to the finance ministry or central bank of any number of emerging economies — think Brazil, Indonesia, South Africa — and you’ll hear a common refrain: The Federal Reserve is making our jobs really hard. There is a widely held view that by printing trillions of dollars and keeping U.S. interest rates near zero, the Fed is essentially creating hard-to-manage bubbles across the developing world.

Bloomberg: – How to play emerging market debt. –  Neuberger Berman Portfolio Manager Gorky Urquieta discusses investing in emerging market debt with Deirdre Bolton on Bloomberg Television’s “Money Moves.”


Bond Funds

About.com: – October 2013 bond market performance overview. – October was a positive month for the global bond markets, bringing fixed-income investors closer to the break-even point in terms of their year-to-date returns. Bonds continued the rally that began in September after U.S. Federal Reserve Chairman Ben Bernanke surprised the markets by announcing that the Fed would not in fact taper the bond-buying program known as “quantitative easing” (QE).

Market Realist: – The FOMC and ISM report drive REITs and builders. – Long-term interest rates are priced off the benchmark long-term bond, which is the ten-year Treasury. These days, the ten-year bond reacts to economic data through the Federal Reserve’s asset purchase program, also known as quantitative easing (or QE). As a general rule, economic data that shows weakness is bond bullish (positive). However, data that shows strength isn’t necessarily bond bearish (negative).

ETF Trends: – Short-duration bond ETF sees inflow surge. – Yields on 10-year U.S. Treasuries have come in since the September peak, which was dangerously close to the ominous 3% level, but on a year-to-date basis, those yields have surged 42.5%.

Reuters: – Vanguard picks ETF ace to run $750 billion bond group. – Vanguard Group, the No. 1 U.S. mutual fund company, said on Monday that Gregory Davis, a major force behind the launch of bond exchange-traded funds, will become the chief of its fixed-income group, which has $750 billion in assets.

Institutional Investor: – A high yield equity strategy with the stability of a bond. – Investors braced for higher interest rates have been shunning U.S. Treasuries and snapping up alternatives such as bank loans and high-yield corporates. But this strategy may also expose investors to market sensitivities that they did not think were part of the deal. But there is another way to go, according to Chris Marx.

MarketWatch: – Investors are shifting buying habits but don’t call it a Great Rotation. – The concept is that investors would rotate their assets from bonds into stocks as interest rates rose and bond prices fell. With some of this movement already behind us, and potentially more to come, the simplicity is giving way to a more nuanced discussion.



All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.

Adam Green is an experienced writer and fintech enthusiast. He he worked with LearnBonds.com since 2019 and covers a range of areas including: personal finance, savings, bonds and taxes.

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