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A lot of dire forecasts for junk bonds in the various links of Ted original link above. Here's some more negative comments, these coming from Michael Aneiro's column in this week's Barron's. Mr. Aneiro has been a regular Cassandra on junk bonds for well over a year now. You know the broken clock analogy, so maybe Mr. Aneiro's time has finally arrived.
>>>Among current pockets of risk, as I've warned in this column before, is the corporate bond market. Not only are corporates rich, but they can also be harder to sell than they were just a few years ago. Since the financial crisis, banks have cut their corporate-bond holdings to keep pace with regulations. Inventory is down by 40% to 75%, according to various estimates, and if there's ever a rush to sell, fewer willing buyers could mean steeper losses, affecting bonds, mutual funds, and ETFs alike. "THERE'S NO QUESTION that liquidity has decreased," says Gershon Distenfeld, director of high yield at AlianceBernstein, who says increased capital requirements have curtailed risk appetite among banks and dealers and made it more costly to maintain bond inventories. He adds that Bear Stearns, Lehman Brothers, and Merrill Lynch used to represent more than a third of U.S. high-yield trading volume, and none of them exist as a stand-alone entity today.
Fixed-income trading at banks "is evaporating," says James Swanson, chief investment strategist at MFS Investment Management. He sees corporate bonds, particularly high yield, as increasingly perilous for investors. "Are those markets, given how low yields are, compensating you for the risk of illiquidity?" Corporate bonds are often pulled in two directions: When equity prices fell amid last week's turmoil, riskier corporates slid, too, but the losses were tempered by gains in underlying Treasury bonds. That pattern can hold up for short periods but will be challenged during more protracted downturns, especially if nobody really wants to buy.<<<
I can't remember when I last read anything positive about junk bonds. This reminds me of the strong consensus against treasury bonds at the beginning of 2014.
Junk bonds have been falling for the last two to three weeks and sold off sharply on Thursday. HYLD, which I sold a week ago, but bought again yesterday (Friday), today has attracted several large blocks of bids in the 20,000 share range. Somebody with deep pockets must be buying today in spite of the negativity.
I haven't been a fan of corporate junk this year preferring municipal junk. But I agree with the above and have stated it before that it seems everyone and their mother hates junk. Marty Fridson highlighted in one of the links above is the acknowledged guru in junkland (and rightfully so) and he has been about as outspoken (since late 2013) as anyone how overvalued junk bonds are. As a reality check, the proxy for junk bonds - the Merrill Lynch High Yield Master II Index - hit its all time high on July 7 and is now down a mere 0.729% from those highs.
Edit: One of the many things that troubles me about junk corporates is how it's on the radar screen of the Fed. Much like it was in November/December 2008 but for the opposite reasons.
Comments
>>>Among current pockets of risk, as I've warned in this column before, is the corporate bond market. Not only are corporates rich, but they can also be harder to sell than they were just a few years ago. Since the financial crisis, banks have cut their corporate-bond holdings to keep pace with regulations. Inventory is down by 40% to 75%, according to various estimates, and if there's ever a rush to sell, fewer willing buyers could mean steeper losses, affecting bonds, mutual funds, and ETFs alike.
"THERE'S NO QUESTION that liquidity has decreased," says Gershon Distenfeld, director of high yield at AlianceBernstein, who says increased capital requirements have curtailed risk appetite among banks and dealers and made it more costly to maintain bond inventories. He adds that Bear Stearns, Lehman Brothers, and Merrill Lynch used to represent more than a third of U.S. high-yield trading volume, and none of them exist as a stand-alone entity today.
Fixed-income trading at banks "is evaporating," says James Swanson, chief investment strategist at MFS Investment Management. He sees corporate bonds, particularly high yield, as increasingly perilous for investors. "Are those markets, given how low yields are, compensating you for the risk of illiquidity?"
Corporate bonds are often pulled in two directions: When equity prices fell amid last week's turmoil, riskier corporates slid, too, but the losses were tempered by gains in underlying Treasury bonds. That pattern can hold up for short periods but will be challenged during more protracted downturns, especially if nobody really wants to buy.<<<
Junk bonds have been falling for the last two to three weeks and sold off sharply on Thursday. HYLD, which I sold a week ago, but bought again yesterday (Friday), today has attracted several large blocks of bids in the 20,000 share range. Somebody with deep pockets must be buying today in spite of the negativity.
Edit: One of the many things that troubles me about junk corporates is how it's on the radar screen of the Fed. Much like it was in November/December 2008 but for the opposite reasons.