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If you happen to be reading a week old copy of the Wall Street Journal and think now might be a good time to buy some Junk bonds. I’ve got some bad news for you, you’ve missed the boat.
Between September 1 and October 15, the extra yield on high-yield debt vs. Treasury bonds jumped by 124 basis points to above 500 bps. Suddenly, one could get paid well for holding risk. But it didn’t last for long, spreads have now shrunk below 440 bps as fear recedes.
To see a list of high yielding CDs go here.
High-yield market guru and author of How to be a Billionaire, Martin Fridson, who just last week deemed the market undervalued for the first time in ages, says all the buying has already made high yield look a bit overvalued again:
Believe it or not, the high yield asset class has swung from rich to cheap and back to (very slightly) rich, all in the space of three weeks. The option-adjusted spread on the BofA Merrill Lynch US High Yield Index was 440 basis points (bps) on September 30, then widened to 508 bps on October 15 in the market’s sharp, sudden sell-off. From there, the spread tightened quickly over the next few sessions and has continued to creep to narrower levels since then.
According to his own model, Fridson says fair value should be 442 basis points. Yesterday, the actual spread narrowed from 444 to 438 bps, pushing it slightly into overvalued territory. Fridson says he doesn’t consider high yield extremely overvalued – which he says it was from October 2013 through June 2014 – until the gap reaches 130 bps, or one standard deviation.
Todays Other Top Stories
Learn Bonds: – Are junk bond ETFs right for your portfolio? – There will be times when the junk bond sector sells off just because the market panics, but that’s not what you should be worried about. You can always move out if interest rates start to rise significantly. In the meantime, buy some high yield ETF so you have some exposure.
Investors.com: – Top municipal bond funds glide higher. – Municipal bond mutual funds have surpassed the performance of the S&P 500 in the past 15 years. Munis are outperforming this year too, gaining 8.5% vs. the S&P 500’s 5.9%.
Fidelity: – Municipal bonds: A core component of a fixed-income portfolio. – Municipal bonds continue to make sense for investors seeking to diversify their portfolio to weather a variety of economic conditions.
The Republic: – Bonds offer protection from big stock-market swings, but what should you expect now? – The recent stock market sell-off is a reminder of the value of bonds in a diversified portfolio. But it’s also important for anyone moving into bonds to keep expectations in check following their decades-long run of strong returns.
Businessweek: – SEC’s answer to market volatility: Ramp up exams of bond funds. – Surging market volatility is making regulators increasingly concerned that bond funds have loaded up on hard-to-sell assets.
Financial Post: – October’s wild ride ‘ just the tip of the iceberg’ as fresh turbulence test post-crisis markets. – A dramatic upswing in volatility is putting post-crisis financial markets to the test, as curbs on banks’ ability to take risks and an increase in technology-driven trading expose potential new cracks in the system.
WSJ: – U.S. government bonds pull back for third straight day. – Investors sold ultrasafe U.S. government bonds for a third consecutive session, as fresh global data soothed anxieties over the economic outlook.
Businessweek: – Treasuries gain with Yen; U.S. stocks extend weekly rally. – The Standard & Poor’s 500 Index rose, extending its biggest weekly rally since January 2013 on better-than-estimated corporate earnings. Treasuries and the yen advanced on haven demand after a doctor in New York tested positive for Ebola.
High Yield Bonds
Elite Wealth Management: – The secret junk bond bomb that could sink the market. – It’s widely expected that the Fed will raise interest rates next year, possibly even next summer. If rates go up, then yields on both investment-grade and high-yield bonds will rise as well. But the real story isn’t the spread between high-yield and corporate bonds, it’s the spread between high-yield bonds and U.S. treasuries.
Businessweek: – Wall Street dealers slash holdings of junk bonds by 68 percent. – Wall Street bond dealers cut their net high-yield bond holdings by 68 percent in the week ended Oct. 15 amid the biggest surge in volatility in more than a year.
FT: – Junk bond funds abate as turmoil subsides. – (Subscription) Net outflows from junk bond funds have finally abated after more than two months of seepage, as appetite for riskier assets recovers after last week’s global market turmoil.
FT Adviser: – U.S. high-yield ‘bubble’ is deflating. – The so-called ‘bubble’ in U.S. high-yield bond markets is deflating, although it is not set to burst, according to a respected economist.
Smarter Investing: – The Halloween candy in your investment portfolio. – Junk bonds are a lot like Halloween candy. Taken in moderation, these high-yielding bonds issued by companies with patchy credit ratings can sweeten your portfolio’s return.
Trustnet: – Paul Causer: Investors are rushing into the riskiest area of the bond market. – The search for yield is pushing investors into the riskiest area of the bond market, says Invesco Perpetual’s Paul Causer, who believes that high yield investors could be set for a difficult period in the foreseeable future.
Artemis: – ILS and cat bond pricing expected to stabilise at 2013 levels. – The world’s largest reinsurance firm Munich Re believes that pricing for catastrophe bonds and insurance-linked securities (ILS) has stabilised at 2013 levels and expects it to remain broadly at current levels for the foreseeable future.
Fortune.com: – Revenge of the mom and pop investors. – Individual investors have returned to the stock market in a very big way. But they are putting their money into plain vanilla, no frills, passive corners of the investing world.
ETF Trends: – Government bond ETFs remain the safer play. – In an attempt to hedge risks associated with a struggling Eurozone and potential Federal Reserve policy changes that could weigh on corporate earnings, corporate bond portfolios have increased U.S. government debt allocations by 15% this year through September, compared to a 6.5% rise for the same period last year, reports Tim McLaughlin for Reuters.
Globe and Mail: – Three strategies for weathering stormy markets. – These three strategies are key to navigating your way safely through stormy market weather. Over the next few years, they will be more important than ever for the simple reason that returns are likely to disappoint.
Investment Week: – How wealth and multi-asset managers are playing a volatile October. – Asset allocators had a torrid time earlier this month as the FTSE slumped below 6,100 for the first time since spring 2013. Here five wealth and multi-managers reveal how they responded.
Investorplace: – Your 10-minute retirement portfolio. – Okay, that title isn’t completely serious. I don’t really expect you to wrap up all your investment planning for retirement in the next 10 minutes. However, I’m wielding a sledgehammer to help you shake loose one of your nagging fears. Getting your money in shape for retirement isn’t as hard as you may think.
Think Advisor: – Janus positioning to gather money as Gross move reshapes market. – Janus Capital Group Inc., the firm that hired bond legend Bill Gross last month, is positioned to pick up client deposits as his move sets an enormous amount of money in motion, said Chief Executive Officer Richard M. Weil.
ETF Trends: – An impressive start for this PIMCO ETF. – With all the attention bestowed upon it in recent weeks, novices may get the impression that the PIMCO Total Return ETF (NYSEArca: BOND) is the only exchange traded fund sponsored by the California-based bond house. Of course, that is far from true. PIMCO issues 16 other ETFs in addition to BOND.
Reuters: – Bond funds worldwide attract $10.5 bln in latest week -BofA. – Investors worldwide poured $10.5 billion into bond funds in the week ended Oct. 22, marking a fifth straight week of inflows, data from a Bank of America Merrill Lynch Global Research report showed on Friday.
Gross: (1/2) Deflation – and lower prices – are good for consumers but bad for investors.
— Janus Capital (@JanusCapital) October 24, 2014
Gross: (2/2) Therefore, in a finance based economy, policymakers will try to create inflation. Let them eat cake! — Janus Capital (@JanusCapital) October 24, 2014
Bidding on short Muni bonds is like forever being in the “friend zone”. No matter how close you get, it never seems to be close enough.
— JD (@Munisrgood) October 24, 2014