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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, March 09, 2010

Junk Bonds

In my view, if you are interested in junk bonds as an investment,
you have every right to demand a 10% annual return on your
money as a minimum for your trouble. It helps when yield to
first call is equal to or exceeds 10%, as then you do not have to rely
so much on shorter term price appreciation. Junk funds are best
for those who do not possess professional credit analysis skills and

In the early autumn of 2008, as the financial panic got into full
swing, junk bond composites topped 15% in yield. I mentioned back
then that this was an attractive deal because you could basically use
the current income to fund your outlay within 5 years. Of course,
the market got much worse for a brief period, but you do not often
get opportunities to earn out your capital in a short period of time
with the issuer's own money.

Now, the Bloomberg 'high yield" composite yield just broke under
9%, so I would rate the market as less interesting and see this
sector as mildly overpriced for players with something of a longer
term horizon.

There is of course a momentum element to the junk market.
Investors tend to chase yield in post-recession periods when short
term rates are low, and may well pursue the junk sector well after
short rates have turned up. A major vehicle of pursuit here would be
the sector swap, where players sell Treasuries and top quality
corporates to rotate into junk and hedge funds short the Treasury
and go long the junk. There's enough hedge fund money in play to
have sector swapping as described bring the Bloomberg composite
down to 8%. Should such occur, I would add the junk sector to my
list of prospective short sales.

If you are more comfortable thinking price with bonds, view the
iShares "high yield" corporate fund chart here.

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