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What's with junk bonds and preferred stocks?

edited January 16 in Fund Discussions
My corporate bond funds (DODIX Dodge and Cox Income, USAIX USAA Income, etc) are taking the expected nose dive, but some junk and preferred ETF's I've been keeping an eye on (USHY iShare High Yield, PEF iShares Preferred, etc) have gone down a lot less. What's up with this? Flight to better income yields? A delayed effect because the duration of the junk bond funds is shorter than the bond funds?

The junk bond funds have twice the yield of the corporate bond funds and their alphas are higher and betas are lower, although that's to some extent apples and oranges. I don't think there's as much risk for the junk bond market as there was the last few years, the losers have been flushed out, everyone's almost done with their dodgy restructuring deals, and the main sectors in that area, energy and real estate, seem to be on the rebound.

Any ideas? I'm intrigued and a little suspicious of these funds.

Comments

  • edited January 16
    Spread in spread-products can absorb minor rate fluctuations just as your car's shock absorbers. But hit a big enough pot hole, and the shock absorber cannot handle that. See chart - USHY is the main chart, PFF (no PEF) and 10-yr $TNX are in the bottom panel.
    https://stockcharts.com/h-sc/ui?s=USHY&p=D&yr=1&mn=0&dy=0&id=p09393672443
  • edited January 16
    Thanks for the chart. You can see that even for a dip below the 200 MA it's only about a 2.5% dip in the NAV, and with the dividend yield above 4% even at today's elevated price, risk seems reasonable. I do have "trial" initial limit order in at slightly below the current 200 MA.

    Ditching the corporate funds is a little more involved since they are in Roth IRAs and it's a PITA to do direct transfers. (They always seem to find a way to reject the transfer. Once it was because my middle initial didn't have a period after it, so I needed a notarized change of name document.) I do my one 60-day transfer a year, just to flush out the stragglers, this years it's probably going to be USAIX since it's my smallest holding and I'm not overwhelmed with the move to Victory.
  • Junk bonds are somewhat like hybrids - they rise and fall with stocks as well as with bonds. Here's Portfolio Visualizer's correlation matrix of USHY vs. AGG vs. SPY vs SPDO (IG corporate). USHY correlates much more closely with the S&P 500 than with the aggregate IG bond market.

    USHY vs. AGG: 0.21
    USHY vs. SPY: 0.48

    SPDO vs. AGG: 0.80
    SPDO vs. SPY: 0.48

    When a fund correlates closely with a benchmark, then its beta tells you the volatility relative to the benchmark. With an R² of 0.64 relative to AGG, the beta of SPDO relative to AGG is reasonably meaningful. But with an R² of just 0.04, the beta of USHY relative to AGG is meaningless.

    One can turn to standard deviation to get a sense of volatility independent of benchmark. Portfolio Visualizer says that the standard deviation of USHY is 8.26%, falling between that of SPY (16.71%) and SPDO (5.91%). Which is as one would expect - the lower the quality of a bond, the less it behaves like a high grade bond.

    IG corporates, while relatively high grade, still carry issuer risk, unlike the AAA bonds which make up a large part of AGG. Thus they are more volatile than AGG, which has a standard deviation of 3.42. (All figures from PV over the maximum time frame it provides.)
  • I do my one 60-day transfer a year

    Be aware that 60 day IRA transfers are restricted to one within a 365 day period, not within a calendar year. One could not, e.g. do a transfer 2/2/22 and then another on 1/12/23.

    https://www.irahelp.com/slottreport/what-year-means-when-it-comes-your-ira-rollover
  • January has historically been by far the strongest month for junk bonds. At one time one of the most exploitable trades out there. As traders began to anticipate this trend, Decembers began to see part of this strength. So I wouldn’t read anymore than seasonality in this month’s performance. In fact, it has been much more tepid than in the past.
  • edited January 16
    MPT stats r and beta are tied to some benchmark, while ancient SD is not. There is a relation among them,

    SD/SD_benchmark = beta/r,

    or,

    SD = (beta/r) x SD_benchmark.

    All 3 terms on the right-hand side are tied to a benchmark, but when they are stirred together, the SD on the left-hand side is NOT tied to that benchmark.

    beta by itself is meaningful only when r is high enough. But SD can stand on its own. That is why I put special emphasis on Relative-SD or Effective-Equity in fund evaluations as it is quite stable over different time periods.
  • "Be aware that 60 day IRA transfers are restricted to one within a 365 day period, not within a calendar year. One could not, e.g. do a transfer 2/2/22 and then another on 1/12/23."

    Yes, it's a 365 (or 366) day wait. "One year period" more specifically. Many sites (even some IRS ones) get this wrong, and say 12 month period, which is different! Or even say "per year", which is ambiguous. The Bobrow v. Commissioner 2014 ruling says "1 year period" and the IRS says subsequent IRS publications will "reflect the Bobrow interpretation of § 408(d)(3)(B)." Publication 590 specifically states:

    "The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA."

    Worse yet, different parts of USC and other state and local laws definine "1-year period" differently. But as far as the IRS is concerned, it's from MM-DD-YYYY to MM-DD-YYYY+1 plus a day just to make sure;-)
  • edited January 17
    I think it’s just a strange period. A lot of things don’t make sense. My equity / balanced funds have been outperforming my multi-asset alternatives while the major stock indexes have been falling - a complete reversal of the norm. Alternatives generally loose less in falling markets.

    Alternatives:
    TMSRX -2% YTD
    ABRZX -1.86% YTD
    QED -1.84% YTD

    Equity & Bal.
    DODBX +3.16% YT
    FLJP +.50% YTD
    RPGAX -1.60% YTD

    Just an aberration I think. As the others may have noted, High Yield, Leveraged Loan, Floating Rate & Preferred are all more sensitive to credit risk and less sensitive to interest rate risk than are investment grade bonds. I own DODIX and am not worried about it. Sharp cookies there. Should be able to do better than cash over 3 year stints even in a mildly higher rate environment.
  • @hank, I too notice that DODBX is up while the balanced index is down, +3.2% vs -2.3%. Will see next week if that is a typo reported.

    I moved sizable investment grade bonds last year to floating rate bonds, ST HY, stable value and cash. There is likely at least 3 rate hikes (possibly 4) this year.
  • edited January 17
    Sven said:

    I too notice that DODBX is up while the balanced index is down, +3.2% vs -2.3%. Will see next week if that is a typo reported.

    It’s nuts. DODBX is heavy into banks which are benefitting from the spike in interest rates. Throw in an overweight in refiners (reported about 2 years ago) and add a 5% short on the S&P (reported within the last 12 months) and you get a 3+% start to the new year. There’s some kind of sorting-out process taking place in the markets. We’ll see where it all leads …

    Marty Zweig - “I’m nervous Lou. Very nervous.”
  • I have checked the data from several sources and DODBX seems to have some good luck positioning YTD. See chart, https://stockcharts.com/h-perf/ui?s=DODBX&compare=BALFX,VBINX&id=p52082935307
  • Thank you for confirming the data. Both financial and energy sectors are ahead of S&P 500 by several % so far this year. The short stock is labeled as hedged equities in D&C recent Shareholder Letter.
    the Fund holds a short S&P 500 futures position with a notional value of approximately 4.1% of the Fund’s total net assets.
    https://dodgeandcox.com/pdf/shareholder_reports/dc_balanced_letter.pdf

    D&C Stock fund is also ahead of the VG value index by several %.
  • edited January 17
    There is quite a range YTD among the moderate-allocation funds (50-70% equity) with DODBX at the top, JABAX at the bottom, multi-asset FMSDX in the middle.
    https://stockcharts.com/h-perf/ui?s=DODBX&compare=BALFX,FBALX,JABAX,FMSDX&id=p76434655482

    image
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