To get the Best of the Bond Market delivered to your email daily click here.
Junk bonds were hammered in July, losing almost 2%, which might have created an opportunity for yield hungry investors. But is this a good time to buy?
High-yield guru Martin Fridson chief investment officer at Lehmann, Livian, Fridson LLC says the recent repricing has removed the extreme overvaluation tag he’s had on the market since last September.
The average junk-bond yield spread over Treasuries rising to 424 basis points from 353 in late June. Fridson’s estimate of fair value is 467 basis points, so a little subtraction shows that the gap between the actual spread and Fridson’s fair value estimate is now -43 bps. That’s down from -198 bps in late June, which Fridson says qualified as an extreme by virtue of exceeding one standard deviation, or 130 bps.
So should you buy the dip? Some big investors like BlackRock are urging high yield investors to “hold course” while JPMorgan sees upside ahead after the pullback:
While we do believe investor interest in allocating to high-yield bonds at a 6% yield is high, we do believe this is another case where valuations overshoot given how far the pendulum has swung for technicals, and the market becomes oversold…. [W]e continue to believe high-yield bond yields will end the year back inside 6%.
However, not all analysts are so bullish. Janney Montgomery Scott credit analyst Jody Lurie points out that while junk bond valuations are better, volatility might not be over yet given August’s typically thin trading volumes:
What’s more is that the yield differential between investment grade and high yield has gapped to a level not seen since the middle of July 2013, which was shortly after last year’s rate shock. The summer slowdown likely added volatility to the sizable selloff from the largest high yield ETFs over the past few days… August is likely to carry a similar tone, though we have the potential for certain issues to calm from July and others to worsen as the heightened absences could add to volatility in rates and spreads.
The good news is that if you’re buying junk bonds today, yields are more than a full percentage point higher than they were six weeks ago before the selloff started. The average junk-bond yield is 5.94% today versus an all-time low just under 4.9% in mid-June, per a benchmark Bank of America Merrill Lynch index.
But remember that the Federal Reserve has fueled some huge gains for high-yield over the past half-decade, and that free lunch may be ending soon. That doesn’t mean sweeping losses are imminent, particularly since defaults remain at record lows, but last month serves as a reminder of how quickly risks can put a dent in your portfolio. Be Careful out there.
Todays Other Top Stories
LearnBonds: – Making sense of the latest fixed income market news. – This is a slow week for economic data. In this edition of “Making Sense,” we will discuss today’s one economic report and catch readers up on the latest news from the fixed income markets.
Investors.com: – Whither ‘muniland’? Municipal debt ebbs as banks loan. – This is not your grandfather’s municipal bond market. Old beliefs about bondholder protections have been challenged by high-profile cases such as those in Detroit and California. The federal government, once seen as a partner by state and local governments, is now a roadblock or worse.
Charles Schwab: – California municipal bond returns rise as economy rebounds. – California’s economy and fiscal picture have improved in the last couple of years, prompting rating agencies to boost the state’s municipal bond ratings.
Bloomberg: – Commonwealth’s Smith says muni bonds a `real pitfall’. – Henley Smith, chief investment officer at Commonwealth Asset Management, talks about his fixed-income investment strategy. Smith also discusses the outlook for bonds and money-market mutual funds. He talks with Pimm Fox on Bloomberg Television’s “Taking Stock.”
Businessweek: – OppenheimerFunds sees some funds shrink 33% on Puerto Rico bonds. – OppenheimerFunds Inc., the largest holder of Puerto Rico debt among mutual funds, has seen some of its funds lose almost a third of their assets in the past year, data compiled by Bloomberg show.
CBS News: – The brilliance of boring, high-quality bonds. – Last week, the U.S. stock market dropped 2.6 percent, with narrow stock indexes like the Dow Jones industrials ending down for the year. Many say stocks have huge risks, and Wall Street could be staring at the beginning of the next great bear market. Suddenly bonds, shunned by many investment advisors, don’t look quite as stupid as they did going into the year.
Trustnet: – Don’t be fooled – the bear market in bonds is coming. – JPM’s Bill Eigen explains that there are a number of myths surrounding the current bond market, when the reality is that fixed income investors are going to be hit by capital losses if they don’t diversify.
Income Investing: – Goldman: Bonds will dramatically underperform stocks in coming years. – Goldman Sachs is out with a sobering forecast for bond investors. Goldman says it sees a “dramatic divergence” between stock and bond returns during the next several years, with bonds getting the short end of the stick.
Businessweek: – Treasuries fall as Middle East truce reduces demand for safety. – Treasuries fell, pushing the yield on 10-year notes higher for the first time in three days, as a truce took effect in Gaza and Israel pulled out its remaining troops, reducing demand for the safety of U.S. government debt.
High Yield Bonds
IFR: – U.S. high-yield market waits for stability. – Activity in the US high-yield primary market was subdued Monday as banks wait for a few days of stability before pulling the trigger on new deals.
Businessweek: – Junk-bond ETFs rally after biggest fall in about a year. – High-yield, high-risk debt in the U.S. rose, ending six straight days of declines, as positive earnings results helped mitigate global credit worries, such as the shock from Argentina’s bond default.
David Stockman: – Three chart alarm: The Fed has set-up the corporate bond market for a big fall. – The three charts below, which appeared in this morning’s Wall Street Journal, are still another reminder that the Fed’s heedless fueling of the third financial bubble this century has done enormous damage to the internals of financial markets.
Income Investing: – Is that junk bond correction over yet? – After a brutal July for the high-yield bond market, is it a good time to buy again?
WSJ: – Junk-debt liquidity concerns bring sales. – A shakeout in the junk-bond market is drawing only cautious interest from bargain-hunters, underscoring investor fears that many once-hot securities could prove hard to sell in an increasingly difficult trading environment.
Virgina Value Investor: – High yield ETFs: History is not your friend. – I want to share some words of caution for the high yield market in general, comments that will apply whether you’re getting your exposure through a mutual fund, ETF or ETN. The second part will address a handful of specific ETFs and their individual issues.
Telegraph: – Are problems emerging for 2014’s star performers? – The emerging markets may have performed better than expected, but can they compete when the US economy is firing on all cylinders, asks Tom Stevenson.
CIO: – Emerging market inflows surge to 18 month high. – Investors’ appetite for emerging markets has surged to their highest point since the first quarter of last year, data has shown.
Scott Arterburn: – Small steps are better than doing nothing. – I think there is a way for people to get more comfortable and ease themselves back into investing. I would suggest that they start out by investing in U.S. government and corporate bond ETFs.
Gary Gordon: – Don’t fight the Fed? Don’t fight the Treasury bond ETF trend. – The trend for influential intermediate-term treasuries in iShares 7-10 Year Treasury Bond is very strong. The longest end of the yield curve with bonds in the 25+ arena is one of the strongest performers year-to-date.
Newsmax: – PIMCO Total Return had withdrawals of $830 million in July. – Bill Gross’s Pimco Total Return Fund had $830 million of net investor withdrawals in July, the smallest month since redemptions began in May 2013, when clients began pulling money from the world’s biggest bond fund as performance faltered, according to Morningstar Inc.
Investment News: – For fund managers, high-yield pullback comes with liquidity risks. – Lower broker-dealer bond inventories and growing use of high-yield funds could test markets, increase price swings.
Businessweek: – PIMCO hires contrarian’s Schwartz for distressed debt. – Pacific Investment Management Co., the firm that oversees $1.97 trillion including the world’s biggest bond fund, hired Ethan Schwartz as a money manager focusing on distressed credit.
Fed Sr Loan Survey: about 1/2 of respondents indicated that the ATR/QM rule has reduced approval rates for prime jumbo home-purchase loans
— David Schawel (@DavidSchawel) August 5, 2014
For all those who care, and I know you’re out there, long-term fixed-rate vol stands at $163 billion
— Joe Mysak (@JoeMysak) August 5, 2014
— NorthernTrustAM (@NTInvest) August 5, 2014