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Understanding Junk Bonds
[By Staff Writers]
High Yield Bonds [HYBs] are debt issued by U.S. corporations that carry less than investment-grade ratings. They are also referred to as “junk bonds.” For the purpose of high-yield bonds; below investment grade means Ba or lower; as ranked by Moody’s, and BB or lower by Standard & Poor’s.
The Market
The market for high-yield bonds is large. A high-yield security compensates the physician-investor for the added risk by offering a higher coupon [interest rate] than could be obtained from investment-grade corporate bonds.
Many Types
Several types of bonds fall within the high-yield sector, including zero coupons, split coupon, increasing rate, floating rate, pay-in-kind, first mortgage, and equipment trust certificates.
These are structured just like other bonds bearing the same name; the only difference is the investment quality of the corporation issuing the debt. Because of the higher coupon [interest rate], there is a potential for higher total returns to the bondholder or physician-investor.
Risk
Because of their inherent risk, these bonds are an alternative for more aggressive physicians and fixed-income investors. They may also be attractive to equity physician-investors who are willing to assume the risk of the lower investment quality. These investors recognize that as the underlying credit quality of the issuer improves, the value of its bonds should increase as well.
Conclusion
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Not So Junky-Bonds
Junk bond yield rose steeply at the beginning of the year while defaults remained relatively low. So, is it time to again invest in high-yield bonds; aka “surrogate equities?” Please opine.
Dr. Marcinko
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m-Health Announces 14% High Yield Senior Secured Health Industry Bonds
Here is the solicitation:
An extraordinary opportunity for high-yield bonds bearing 14% annual interest was announced today by mHealth Technologies Corp., particularly suitable for doctors.
Click here for Private Placement Memorandum.
Click to access mHealthPPM_v_11Sep13.pdf
Should I bite?
Dr. Singh
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The Fortune-Tellers
Dr. Singh – Junk bond managers sell fast when they see risk. So when junk bonds underperform stocks, it can mean trouble.
For example, in the months before Lehman blew up, high yield investments were down 2%, and stocks were up 3%. High yield also lagged stocks ahead of sell-offs in stocks in 2010, 2011 and 2012. Now, we are seeing the same thing.
This summer, high yield bonds have underperformed stocks. Over the past three months, the SPDR S&P 500 (SPY) exchange traded fund is up 75%. But the SPDR Barclays High Yield Bond (JNK) ETF has fallen 2.10%.
So, is this is a very dark sign for stocks?
Jeremy
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The Milken Rule and “Wide/Sustainable Moats”
This is an excellent historical review of the high-yield bond industry, and competitive analysis, applicable to most all industry sectors by Bill Smead.
http://wealthmanagement.com/viewpoints/milken-rule-and-widesustainable-moats?NL=WM-05&Issue=WM-05_20140102_WM-05_915&YM_RID=marcinkoadvisors%40msn.com&YM_MID=1441742&sfvc4enews=42&cl=article_4
Great business school stuff. I was in Philadelphia at the time.
Dr. David Edward Marcinko MBA CMP™
http://www.CertifiedMedicalPlanner.org
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Junk Bonds Credit Risk Back In Play?
It seems markets are now catching on to the fact that the European economy continues to weaken (if not accelerate downward) and that the “blessing” of lower commodities prices was not a cause for optimism, but rather an effect of commodities markets’ lower expectations of future global economic growth (including that of the US, whose economy seems likely to be pulled down along with its global counterparts).
But, there hasn’t seemed to be much talk of the effect of these developments on the junk bond market, particularly credit risk.
Given the potential for interest rates to fall in a slower growth environment (not to mention the potential for lower rates on central bank intervention – asset purchases of debt), the recent sharp fall in junk bond prices would seem to be mainly on increased concerns of potential defaults (credit risk).
The not-so-long-ago notion that high-yield default risk is off the table now seems quite questionable.
David Twyford
http://unlovedmoney.com/2014/10/11/junk-bonds-credit-risk-back-in-play/
[via Ann Miller RN MHA]
NOTE: David Twyford is a private investor. He is a former commodity exchange member/broker who has been quoted by Forbes and written for Futures magazine.
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When to Fear High Yield
[By Charlie Bilello – Director of Research]
In recent weeks, high yield bonds have traded lower and their spreads versus risk-free Treasury bonds have widened to their highest levels since 2011. The financial media responded as expected, with fear-inducing coverage warning of impending doom. The entire junk bond asset class was maligned, along with the ETF structure, with Carl Icahn leading the charge.
To be sure, rising credit spreads from ultra-low levels can be harbinger of bad things to come, but pointing this out ex-post (after the fact) does little good to the average investor. And provoking panic in an entire asset class is just about the worst thing you can do.
If not ex-post, when should investors start worrying about high yield? A good start would be when the name “high yield” is a misnomer – when yields and credit spreads are at extreme lows. At such levels, there is little cushion for future defaults, and the risk/reward is skewed to the downside.
When to Fear High Yield
Which brings us back to the title of the article: when to fear high yield. Regardless of your outlook for 2016, the time to be most afraid of high yield is when yields and spreads are low. If 2016 is another 2008 and the U.S. enters a recession, yields and spreads will rise and high yield bonds will certainly fall further from here. But that doesn’t change the fact that investors are better positioned for this scenario today than they were in June 2014 when spreads/yields were at their lows.
It also stands to reason that if you are afraid of a 2016 collapse in high yield, you should be more afraid of a collapse in equities which are the riskier asset class that is lower in the capital structure.
https://pensionpartners.com/when-to-fear-high-yield/
Michael A. Gayed CFA
Portfolio Manager
http://www.pensionpartners.com
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