2 thoughts on “Do recent events create opportunities in high yield?

  1. A thoughtful comment. I can’t argue with not buying the dip in high yield as a generic strategy. Deflation in commodity prices including oil is crushing specific participants in the junk bond sector while at the same time it is a benefit to others where hydrocarbons and, in some cases, other hard commodities are an input to their costs. The lack of liquidity, particularly in those securities where the fundamentals of the businesses have deteriorated, has led to a selling of the more liquid higher quality bonds in some portfolios as well to meet redemptions. They all get sold when a high yield ETF has to redeem. I am not interested in owning the high yield index. I am interested in taking advantage of the higher yields in the companies that have the lowest risk of credit issues. That takes active managers. I like the added idea of active managers who can actually develop shorts, typically using CDS’s and other techniques, when the disparity in performance among companies increases. Oil and other commodities are 18-20% of the high yield index. Those funds or ETFs that track the high yield index are making a conscious decision to own those securities. I don’t think that is a good idea. I also have never thought it was a good idea to add less liquid securities to a daily traded portfolio to enhance the yield. Regarding the world economic recovery, we do expect the global economy and the US economy to continue to grow. We have, on balance, been in a recovery since the Great Recession. We expect this to continue, but at a lower rate than history would suggest, primarily as result of China growing slower. This will produce more specific accidents. The best active managers will do a better job of avoiding those while taking advantage of the higher yields in the companies where fundamentals continue to look good. Sorry for the long response, but you hit all the issues (very succinctly) that one has to deal with to make the argument that on a specific basis there are high yield securities to own.

  2. Buy the dip in high yield? I don’t think so. Deflation in commodity prices is crushing the junk bond sector either directly or indirectly. As recent experience shows, there is very little liquidity in this market. These are not ordinary times and in times of stress, it is the CCC and below bonds that go first. The only argument for lending to this sector is that we are in a world economic recovery and that is an exceedingly difficult argument to make.

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