About Me

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 !!!

Thursday, October 14, 2010

Junk Bonds

Junk is now trading slightly inside of 8%, and some new issues have fetched 7.5%. That
is a far cry from the 25% yield level the Bloomberg High Yield Index sported at the height
of the financial crisis in late 2008. I thought the junk market was terrific when yields went
above 15% in 2008 because you could earn out your capital within 5 years time. Not often
do you get deals like that!

Increasing confidence in this market has perked right along. The economy has been
recovering, the Fed says it will backstop the recovery with additional liquidity, and It has
pledged to keep short rates low for an extended period. So the market has been drawing in
funds from big and small players alike as the yield hungry feast on this sector.

Being a stingy guy, I do not like to put capital at risk unless I think the potential is there
to earn 10% a year. If I buy junk now, I pick up only 8% in current return or less, and am
in the position of having to see the market rally mildly but regularly going forward. Since
junk yields are subject to business, inflation, interest rate and supply risk, I get edgy
buying junk inside of 9.75% as a matter of principle.

Junk bonds can rally in price for a spell even after the Fed reverses course on monetary
policy and begins to raise short term rates, so many players no doubt feel they have a
"cushion" of time to squeeze out more price gains from holdings.

Still, if you own junk bonds and have been doing well, it is probably a good time to
review whether these issues still meet your strategic goals. For now the trend remains
your friend. Chart.http://stockcharts.com/h-sc/ui?s=MHCAX&p=W&yr=3&mn=0&dy=0&id=p49435614194

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