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after an era of 1% FF rates and investors being pushed to take all kinds of risks, to get yield,
wouldn't HYield be set up to go down?
3rd rate credits priced at 2nd rate prices.
comments?
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To be specific, it depends.
Of which High yield vehicles are you speaking?
In general it a much too broad assumption. What goes up must go down and in market parse what goes down must go up. These ideas aren't wrong nor are they useful.
What are the drivers for lowering High Yield vehicle returns?
Across the spectrum of yields prices are on the high end but you are more likely to find a value within the high yield arena.
comments?
jack
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The driver is HY has been bid so high by yield chasers not
credit judges.
Or broadbrush, as reality strikes through, returns will go negative.
That is my hypothesis.
closed end junk funds is a way to do it but many sell at discounts to NAV already.
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If you look at the Lehman junk index as an indicator of the overall junk market (not to be confued with select opportunities), 2003 was the very hot year for junk, after a few bearish years during the stock market collapse. The last couple of years, capital returns have been steady or slightly negative (last year) with yields steadily falling. Yields on the index aren't much more than a couple of % points above the Total Bond Index yields.
That doesn't suggest junk getting hot again,overall, but of course there are not only likely to be select picks for Charlie out there, if the auto industry, which is now a high % of the junk index after downgrades, turns around, that would certainly boost the capital return on the index. (Of course, that means the best way to tap into the gain would be to buy auto junk parts for yourself.)
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The junk sector could be in for a hit; on the other hand, it's a market all to itself, in some ways.
Besides the oft-noted flat yield curve, plotting yield vs. maturity, what I find, to my dismay, is how little you get for yield in the high-end (Investment-grade) rated bonds these days.
My own informal, unscientific scan of corporate bonds available shows me that:
AA-rated bonds are going for 25-50 basis points over Treasuries.
A or A-1-rated bonds are going for 60-90 basis points over Treasuries.
(With same or close maturities.)
So - why buy the corporates unless you're a pension fund money manager, who needs every basis point of yield to justify your existence?
If you're a tax-paying citizen, the corporate bonds are subject to state and federal income taxes; the Treasuries, to federal only. So by the time you take out the state tax on your bond yield, you're very close to the point where you get nothing for assuming normal commercial credit risk on the corporates. Granted, the A to AA bonds are quite good, but for the little extra you're getting, why not stick to the Treasuries?
I'm not buying bonds, now, anyway, just grumbling.
Bill
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My own informal, unscientific scan of corporate bonds available shows me that:
AA-rated bonds are going for 25-50 basis points over Treasuries.
A or A-1-rated bonds are going for 60-90 basis points over Treasuries.
(With same or close maturities.)
Heh heh heh its actually starting to spread out a little compared to last quarter and before.
handy link for such things
http://www.bondsonline.com/Todays_Market/Corporate_Bond_Spreads.php
jack
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Thanks Jack. I didn't know they had that feature.
Bill
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