Author Topic: Junk Bond market has jumped the shark  (Read 3161 times)

brewer12345

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Junk Bond market has jumped the shark
« on: May 22, 2013, 09:21:55 AM »
Assuming a tender offer settles as expected within the next week, I will be completely out of junk bonds for the first time in 5 years.  I sold my last lot of junk this morning at a very nice price and I want nothing to do with the vast majority of teh paper that is out there now.  Spreads have crashed to very low levels for the amount of risk you aretaking, covenant protection for bondholders is becoming appallingly slight, and issuers are both levering up and extending maturities.  So I would offer a piece of advice to any would-be yield chasers here: caveat emptor.  There are good times to be in and very good times to be out of junky paper.  I think we are now in the latter.

Another Reader

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Re: Junk Bond market has jumped the shark
« Reply #1 on: May 22, 2013, 09:41:20 AM »
All holders of bond funds should look at the underlying paper held by the fund.  A surprising number of these funds have acquired junk grade bonds to juice the yields.  Cutting loose any fund that has these issues in the portfolio should be something you would want to consider.

brewer12345

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Re: Junk Bond market has jumped the shark
« Reply #2 on: May 22, 2013, 09:45:47 AM »
All holders of bond funds should look at the underlying paper held by the fund.  A surprising number of these funds have acquired junk grade bonds to juice the yields.  Cutting loose any fund that has these issues in the portfolio should be something you would want to consider.

Agree.  I would also suggest looking at your funds to see how much agency MBS they have.  This stuff has effectively zero credit risk and is a large part of broad bond indicies, but is very ugly in a rate rise scenario.

smedleyb

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Re: Junk Bond market has jumped the shark
« Reply #3 on: May 22, 2013, 11:07:07 AM »
I see a powerful reversal intraday on the 10 year (but day is far from over), pushing yields again over 2%.  Did that volatility have any impact on your decision to act right now?

brewer12345

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Re: Junk Bond market has jumped the shark
« Reply #4 on: May 22, 2013, 11:11:09 AM »
I see a powerful reversal intraday on the 10 year (but day is far from over), pushing yields again over 2%.  Did that volatility have any impact on your decision to act right now?

Nope, at least not on junk.  Junk typically has pretty low duration/interest rate risk and most of it is callable anyway.  It is all about the trade off between the risk of default X loss given default vs. the potential income and capital gains.  The risk is high and growing while the income is paltry and potential capital gains do not presently exist.

smedleyb

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Re: Junk Bond market has jumped the shark
« Reply #5 on: May 31, 2013, 01:59:26 PM »
brewer, junk appears to be rolling over.  My proxy JNK is getting pulverized as we speak. 

Good call.

Another Reader

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Re: Junk Bond market has jumped the shark
« Reply #6 on: May 31, 2013, 02:06:35 PM »
I sold the last of my bond funds today.  Junk rolls over first, the rest will follow.  The genie seems to be out of the bottle.

brewer12345

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Re: Junk Bond market has jumped the shark
« Reply #7 on: May 31, 2013, 02:13:09 PM »
The junk market typically blows up every 3 to 5 years.  Be ready when it happens and there are some very attractive gains to be made.

Bank

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Re: Junk Bond market has jumped the shark
« Reply #8 on: May 31, 2013, 03:04:39 PM »
Hmmm... I've been in HYG for about 18 months and ditching it right about now might not be a bad idea, at that.  Thirty day yield is only at 4.68%.  Thanks for the reminder.