Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Are Junk Bonds About to Become a Victim of Their Own Popularity?

Interest-Rates / US Bonds May 02, 2012 - 08:04 AM GMT

By: Money_Morning

Interest-Rates

Best Financial Markets Analysis ArticleDon Miller writes: In our current low-interest-rate environment, many investors are widening their search for more income by buying junk.

Junk bonds, that is. More formally known as high-yield bonds - junk bonds have been on a tear lately.


With the Federal Reserve vowing to keep interest rates at or near zero through 2014, investors seeking higher-yield investments are eyeing junk bond exchange-traded funds (ETFs).

Investors dumped $31 billion into high-yield bond funds during the first quarter of 2012 according to research firm EPFR Global. That's almost four times the global demand for junk-bond funds in 2011.

Here's why.

Junk bonds are offering generous dividends at a time when most other bond investments aren't even matching the rate of inflation.

"Clients are essentially trying to replace the income they used to get from their government bonds," Hans Olsen, head of investment strategy in the Americas for Barclays Wealth, told Bloomberg News.

Indeed, one of the largest junk bond exchange traded funds, the iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) is currently yielding more than 7%, while yields on the 10-year Treasury note hover just above 2%.

But while robust demand and issuance for junk bonds is a sign of a healthy market, there are reasons for concern.

Junk Bonds: Default Rates Not the Whole Story
There's evidence that investors chasing income in the form of high-yield debt are taking on increased risk.

It's possible investors in high-yield debt are being lulled into complacency by low default rates. Corporate balance sheets haven't looked this good since the financial meltdown of 2008.

Global speculative-grade debt defaulted at a rate of 2.3% over the past 12 months, down from 2.6% from the first quarter of 2011, according to Moody's Investors Service. The ratings company expects the default rate to rise to only 3% by year-end -- still a relatively low number.

Still, investors should be aware that junk bonds come with the full risk of the corporate entities that back them.

"We consider investing in high-yield corporate bonds to be similar to investing in the equities of companies with highly leveraged balance sheets," says Morningstar Inc. (Nasdaq: MORN) analyst Timothy Strauts.

"With increased leverage comes the increased probability of default and bankruptcy."

But the biggest risk for junk bonds may not be that the companies backing them might end up in bankruptcy. Even a major Black Swan-type event isn't likely to trigger a financial crisis on the magnitude of 2008.
Instead, what might be the biggest nemesis of junk bonds is their own popularity.

The prices of almost all bonds have catapulted up to extreme levels in recent years, driving yields to historic lows.

If global interest rates suddenly climb, junk bond prices - along with most bonds - would likely get clobbered.

"There is a lot of money rushing into this space right now," Paul Jacobs, a financial planner at Palisades Hudson Financial Group, told ETF Trends. "As quickly as it came in, you could see that money flow out."

In fact, investors have begun to show caution as doubts about the strength of the global economic recovery and new concerns over the Eurozone debt crisis have reemerged.

Junk bond mutual funds and ETFs saw net outflows of $1.3 billion in the first week of April for the first time in nearly five months, according to data from Lipper Inc.

"The massive withdrawal...continues a trend that has seen investors back away from the junk-bond market because of renewed fears about the strength of the global economy and about Europe's sovereign-debt crisis," Dow Jones Newswires reports.

Junk Bonds are Stock Market Barometer
Even if you're not a junk-bond investor, it's important to study and understand these recent developments in the high-yield debt market. The reason: They can serve as an early warning signal for trouble to come in the stock and bond markets.

High-yield bonds have been "great tools to help call major tops and bottoms," Chris Kimble at Kimble Charting Solutions wrote in an investment newsletter.

Investors right now need to answer two big questions, according to Shah Gilani, an investing expert behind Wall Street Insights &Indictments an insider's take on the markets.

1.Are they just too late to the party to expect substantial returns?

2.And will the smaller (lower-yielding) coupons being offered at this stage of the game cushion them if volatility increases because interest rates start to surge?
Stock prices could tank hard if leveraged investors who borrowed to increase the returns they get on junk debt are forced to dump positions and the stocks of the companies that issued them, Gilani warned.

Any meaningful jump in market interest rates, or a precipitous drop in stock prices, could be a signal to take profits in high-yield investments, he said.

At the same time, Gilani says it could be a great opportunity to buy some protection with "Puts" on theSPDR Barclays High Yield Bond ETF (NYSE: JNK). Bottom Line: Now would be a great time to review your holdings and assess your personal risk tolerance against a market that's likely to remain volatile.

Source :http://moneymorning.com/2012/05/02/are-junk-bonds-about-to-become-a-victim-of-their-own-popularity/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules