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Ping Junkster on HY Data

beebee
edited June 28 in Other Investing
Quote from David Rosenberg's newsletter "Breakfast with Dave":

Wealth-Track_Breakfast_with_Dave_2020_06_24.pdf

1.High yield rates “should be” trading closer to 11.0% than 6.4% to compensate for default risk. And that’s for today’s default rate — we haven’t even hit the peak yet. A no-brainer assessment of how mispriced this asset class is at the moment. In fact, when you look at the 50-year history of the data, you will see that the norm is for the average coupon in the high yield market to be about 500 basis points above the prevailing default rate at any given moment of time. Today, the two levels are dead-even — and another case to be made that appropriate compensation for the inherent default risk is much closer to 11% than it is to 6%.
2.The high yield market seems to be pricing in a default rate of 3.25%, which is half today’s level. Instead of discounting a recessionary default rate, the market is pricing in a default rate we typically see three years into the economic recovery.

and,

To be sure, the stock market is way too overpriced for my liking. But the future earnings outlook is a source of debate, and the bulls have stated their case.And I get it. But high yield bonds —come on, it’s as plain as day. It’s about default risk and getting the compensation you deserve as an investor. But you see — it is the debtor, the borrower, that the Fed is most concerned about... creating this massive gap between the current artificial price and true intrinsic value will not, in the end, serve anyone very well.
@Junkster - Are you drinking from this punch bowl?

Comments

  • edited June 29
    No not drinking from that punch bowel. Junk seems to have topped with stocks in early June. Defaults should continue to rise albeit prices bottom way before defaults. Obviously junk’s strength and the apparent mispricing referred to above is primarily due to the Fed and their announcement they will be and now are buying a junk ETF. Junk could continue to confound the experts but for now there are better values and trends out there in Bondland.

    Edit. Also recently on big up days in stocks junk has notably lagged. Not a good sign. Today was yet another example of that as it was actually negative on the day.
  • beebee
    edited June 29
    Thank for your comments @Junkster.

    I was hoping THOPX would offer some safety in short term bondland. Its10% fall in March and subsequent lag these last few months have me thinking I may be the one drinking from the bowel with this fund? 70% of their holdings are bbb or lower.

    Your thoughts?
  • bee said:



    I was hoping THOPX would offer some safety in short term bondland. Its10% fall in March and subsequent lag these last few months have me thinking I may be the one drinking from the bowel with this fund? 70% of their holdings are bbb or lower.

    Two bond funds that have held up relatively well this year are Vanguard's intermediate-term bond funds, VBILX (an index fund, expense ratio .07%) and VCORX (actively managed, expense ratio .25%). Both funds are basically 50% in government bonds and 50% in investment-grade corporates. This total-return chart shows their performance compared to THOPX and to Vanguard's junk-bond fund VWEHX. https://stockcharts.com/freecharts/perf.php?THOPX,vwehx,VCORX,VBILX


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