Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Election Year Cycles – What to Expect? - 4th Jun 20
Why Solar Stocks Are Rallying Against All Odds - 4th Jun 20
East Asia Will Be a Post-Pandemic Success - 4th Jun 20
Comparing Bitcoin to Other Market Sectors – Risk vs. Value - 4th Jun 20
Covid, Debt and Precious Metals - 3rd Jun 20
Gold-Silver Ratio And Correlation - 3rd Jun 20
The Corona Riots Begin, US Covid-19 Catastrophe Trend Analysis - 3rd Jun 20 -
Stock Market Short-term Top? - 3rd Jun 20
Deflation: Why the "Japanification" of the U.S. Looms Large - 3rd Jun 20
US Stock Market Sets Up Technical Patterns – Pay Attention - 3rd Jun 20
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

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