Displaying items by tag: high yield

(New York)

The broad expectation is that rate cuts will boost all bonds. To some degree this is likely true. However, not all bonds will be affected to the same degree. For instance, safe bonds—think investment grade corporates and Treasuries—have likely already seen most of the gains they will. But high yields are a different story, as they are much more likely to see a decent rally, as lower borrowing costs are a bigger boon to those companies and the cuts themselves will help sustain the economic cycle, which is more important for them than for ultra-safe companies.

FINSUM: This seems to be pretty good analysis. This rate cut has been widely projected and safe bonds have already seen gains, so junk may be the biggest beneficiary.

(New York)

On the one hand the market looks very healthy (new all-time highs every day), but if you look more deeply there are some signs of dysfunction that appear as though they may spill out into the biggest indexes. Demand for risk assets looks quite weak. Consider for instance that the Russell 2000 is hurting even as large caps rise. Similarly, junk bonds are not doing well despite the seeming risk-on environment. Both of those developments show that liquidity is lacking. “Small caps are more sensitive to liquidity issues, both good and bad”, says a market strategist.

FINSUM: The weakness is small caps and junk bonds shows that more investors are sitting on the sidelines right now, but that does not necessarily mean trouble more broadly.

(Frankfurt)

American investors seem almost conditioned to ignore the rest of the world. Over the last decade that has been a pretty good plan as the US recovery and markets have had a Teflon coating that resisted global downturns. However, rates market in Europe is sending some grave warning signals. Try this on for size: several European junk bonds are now trading at negative yields. Yes, you read that correctly, investors are paying for the privilege of holding junk in Europe.

FINSUM: This is not some ultra-safe Germany sovereign bond that has negative yields. We are talking run-of-the-mill EU junk bonds having negative yields. That is a big warning sign.

(New York)

The dovishness from the Fed has been bullish for most of the debt market, with sovereign yields falling and corporate debt getting a boost. However, the riskiest corner of the market, triple C junk bonds, have been left out, with the group falling by 1.5% since May. Triple B bonds, by comparison, were up. The odd part about the losses is that signs of an interest rate cut are usually very bullish for junk bonds because they would mean lower interest burdens for the companies. That said, anxiety about the economy is high enough that such benefits were negated.

FINSUM: This whole situation makes sense in that the downside risk of a sinking economy is greater than the upside of lower interest rates for this subsector. Thus, the bonds are losing. In other parts of the credit spectrum, the risk-reward balance is different.

(New York)

Investors are currently worried about corporate bonds. On the one hand performance has been pretty good, especially for the riskiest bonds. But therein lays the problem—highly indebted companies have not been punished and there appears to be way too much corporate debt at the moment. This is the Fed’s view and many market participants, but Goldman has shared another—that the amount of corporate debt in the economy is just fine and corporate balance sheets look healthy. The bank says US companies are in an “unusually healthy position this deep into a business cycle expansion”. Goldman notes that companies are spending a smaller share share of their cash flow on interest than they were a decade ago, and that they are earning more than they are spending.

FINSUM: The corporate debt situation is all about perspective. Things look better than in the last crisis, but anyway you slice it, the debt burden looks at least somewhat daunting.