Bonds: High Yield
(New York)
There has been a lot of worry about bond prices recently. With inflation rising steeply and the bond market still regaining its footing, it is easy to worry about another sharp selloff. Because junk bonds are on the riskier end of the fixed income spectrum, many think there is more risk in this area. However, the opposite is true, especially in a rising economy. Because they tend to have higher yields and shorter terms, junk bonds naturally have less rate risk. Additionally, because of their underlying financials, junk bonds have a lot to gain in a rising economy. For example, they may be likely to get upgraded, and because of their relatively weak financial positioning to begin with, even minor gains can mean substantial valuation improvements.
FINSUM: If you need income, then high yield bonds are one of the best bets given their natural rate hedging and their potential for significant financial improvement.
(New York)
Junk bonds have been riding the rally like many other financial sectors…see the full story on our partner Magnifi’s site
(New York)
Yields did something very alarming today: they shot up to their highest level in two weeks as a kick-off to summer trading. Yield rises were the epicenter of all the volatility a couple of months ago, and have been the key driver of stock returns as they are the primary asset for pricing inflation risk. So the big question is where will they go from here?
FINSUM: Inflation fears have calmed, but commodities prices are still keeping those worries alive. The Fed seems to hold the key to the whole issue. As long as it walks the line that inflation is transitory, and data at least marginally backs that up, the market will be fine. But if we get a couple suspect reports, and a bad headline or two, all exacerbated by an off-the-cuff Fed remark, we could easily stumble into a correction.
More...
(New York)
The stock market has been absolutely killed lately, but you wouldn’t know it from looking at bonds. Several high yield indexes have barely budged, despite the big worries over inflation and rates. Why? Aside from some high yield bond mechanics which make them less rate-sensitive, the answer is that investors are very excited about the sector. The market is anticipating a big wave of credit upgrades in the next year, and all investors in the space are trying to buy up the winners (who will jump in value when upgraded).
FINSUM: Earnings are doing well and there is a lot of investor demand for new high yield debt. Junk bonds look like they have a great runway for the rest of the year.
(New York)
Income is scarce and investors need it more than ever (funny how that happens). Bonds look very risky given the direction of rates. So where can investors turn? Take a look at three different asset classes: blue-chip REITs, preferred shares, and property-backed loans. Blue-chip REITs can be a good investment because they have high yields (e.g. 4%+), but are still quality companies. They are also often trading at a discount because of the pandemic. Check out ticker “0”, Realty Income. Private property loans are another good option, yielding 8-12% , and often having good LTVs of around 60%, which means you have some significant downside protection.
FINSUM: These are some good alternative income options. Our personal favorite are the REITs because of their liquidity, but private property loans are a good option too, especially given the new economic cycle.
(New York)
There has been a lot going on in the SPAC world, and high yield bonds have been very active lately given the rate environment too. But from a casual glance it would be hard to see that the two have much impact on one another. Yet, as it happens, SPACs are helping strengthen the high-yield bond market. According to the Wall Street Journal, “The wave of cash raised by special-purpose acquisition companies is rolling into the junk debt market, aiding distressed companies and rewarding investors who own their bonds and loans … SPACs, also known as blank-check companies, have issued roughly $100 billion of stock this year, a record, to buy private companies and take them public. Some SPACs are targeting companies with below-investment-grade credit ratings, hoping to use their cash piles to pay down debt and grow the businesses”.
FINSUM: When there is that much money in search of targets, it makes perfect sense that the search would extend into the high yield market.