Junk Bond Investors are DTF

The junk bond rally – and the whole investment grade corporate bond rally for that matter – can be looked upon from two opposing viewpoints.  The optimists will tell you that it is a sign of underlying strength in the economy, denoting the fact that US creditors are comfortable with the risks involved with lending to these companies.  The pessimists will tell you that the creditors will be proven foolish and eventually lighter in the wallets, so who cares what their willingness to lend may signal?

Below I’ve got a smart take from both an optimist and a pessimist on the junk bond rally and the fact that investors in the high yield market are DTF (Down to Finance):

First, here’s Ryan Detrick, Chartered Market Technician (CMT) and Senior Technical Strategist at Schaeffer’s Investment Research:

With that said, there are still two areas holding up well that make me think the economy won’t tank, and could very well improve drastically during the second half of the year. Housing and junk bonds are both showing some major improvements, and this is definitely an encouraging sign. The majority of the housing data over the past two months has been very positive. In fact, housing starts in June came in at their highest level in three years. Turning to junk bonds, they can be a very good gauge of economic growth. Think about it — these are bonds on the riskiest of companies, and improvements here show an appetite for risk. Why would anyone buy bonds if you think the company paying would just default? Right now, various junk bonds are breaking out — suggesting the economy could be on much better footing than most give it credit for.

A perfectly reasonable, logical and historically accurate line of commentary.

But then there’s this bit on how the junk rally is a massively obvious bubble, from Stephanie Pomboy (MacroMavens), who was quoted extensively in this weekend’s Barron’s:

And Stephanie’s nothing if not adamant that the junk portion of the bond market meets “all the standard criteria of a bubble.” She cites, by way of illustration, the fact that junk yields are now “hovering around the all-time lows notched in 2005 — the absolute peak in the greatest asset bubble and credit-financed expansion of our lifetimes.”

Further evidence of the junk-bond bubble if you harbor any doubts on that score is that, according to the EPFR Global, in the first quarter of this year investors put a hefty $33 billion into high-yield bond funds — four times as much as they bought in all of 2011. In the past three years, assets of junk bond funds have more than doubled.

And when the bubble bursts, as Stephanie believes it inexorably will, among the likely big losers are Jane and John Q. who saw junk as a way to possibly recoup some of their vicious real-estate and stock-market losses, and insurance companies, the biggest holders of corporate debt and the largest counterparties in the derivatives market.

And pension funds are front and center on the endangered list, having, as Stephanie notes, “loaded the boat with junk in a desperate attempt to meet 8%-plus return assumptions in a 1.5% risk-free world.”

Please bear in mind that Stephanie’s “Hear Me Now, Believe Me Later” newsletter from March of 2006 was one of the most frighteningly prescient pieces of market forecasting ever written.  It was the ultimate spoiler alert, written in a runaway bull market no less, about how the housing bubble was going to collapse and destroy the economy on its way down.

No it is very possible, of course, that they are both right (as they would have been at the prior record low-yields for junk from back in 2005).  In that example we did, of course, get quite a solid 18 months out of both the stock market and the economy before the eventual collapse began in late 2007.  And so in in the case of 2005, both the optimists and pessimists would have been right on the high yield market and it’s meaning.  Junk bonds rallying was both a sign of strength and a distant early warning about the quality of liquidity splashing about back then.

But what does the junk bond rally mean this time around?  Is the dour take from Stephanie correct or is Ryan’s citation of healthy financing for junk one more sign that the recovery is still alive and well under the surface?






This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Bitcoin Era Scammed You? commented on Sep 23

    … [Trackback]

    […] Find More Info here to that Topic: thereformedbroker.com/2012/07/23/junk-bond-investors-are-dtf/ […]

  2. best wig commented on Sep 25

    … [Trackback]

    […] Here you will find 68940 additional Information on that Topic: thereformedbroker.com/2012/07/23/junk-bond-investors-are-dtf/ […]

  3. https://immediate-edges.com commented on Oct 03

    … [Trackback]

    […] Find More Information here on that Topic: thereformedbroker.com/2012/07/23/junk-bond-investors-are-dtf/ […]

  4. Social Media Marketing commented on Oct 10

    … [Trackback]

    […] Find More here to that Topic: thereformedbroker.com/2012/07/23/junk-bond-investors-are-dtf/ […]

  5. orangeville real estate agents commented on Oct 16

    … [Trackback]

    […] Read More on that Topic: thereformedbroker.com/2012/07/23/junk-bond-investors-are-dtf/ […]

  6. booking com au commented on Nov 22

    … [Trackback]

    […] Find More on to that Topic: thereformedbroker.com/2012/07/23/junk-bond-investors-are-dtf/ […]

  7. Selective regression testing commented on Dec 02

    … [Trackback]

    […] Info on that Topic: thereformedbroker.com/2012/07/23/junk-bond-investors-are-dtf/ […]

  8. td trust easyweb commented on Dec 04

    … [Trackback]

    […] Information to that Topic: thereformedbroker.com/2012/07/23/junk-bond-investors-are-dtf/ […]

  9. www.bmo.so commented on Dec 05

    … [Trackback]

    […] Find More on that Topic: thereformedbroker.com/2012/07/23/junk-bond-investors-are-dtf/ […]

  10. CI CD Services commented on Jan 11

    … [Trackback]

    […] Read More on that Topic: thereformedbroker.com/2012/07/23/junk-bond-investors-are-dtf/ […]

  11. DevOps Companies commented on Feb 04

    … [Trackback]

    […] Find More Information here to that Topic: thereformedbroker.com/2012/07/23/junk-bond-investors-are-dtf/ […]