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Are Junk Bond Investors Paying Rolls Royce Prices for Jalopy Securities?
One of my more prescient calls of the past two years has been to move readers into the junk bond arena (click here for my “2009 Annual Asset Class Review” at http://www.madhedgefundtrader.com/january_5__2009.html ). My argument then was that the market was discounting a default rate of 14%, but that the realized default rate would be a tiny fraction of that.
This turned out to be true, prompting the (JNK) ETF to deliver a parabolic 80% return, not bad for a bond fund. Similar gains were seen in the other junk ETF’s, like (HYG), and (PHB). However, it looks like this market is returning to the bad old days that we saw at the last top of this market in 2007.
Inferior credits are now flooding the market with dubious conditions, lax covenants, but premium terms, taking new issuance up to an unbelievable $172 billion during the first nine months of 2010. Banks may not be willing to lend, but investors of every stripe are more than happy to. Investors are once again paying Rolls Royce terms for jalopy credits. Apparently the reach for yield knows no bounds.
If you haven’t started to sell off your position in this area, I would begin to do so. What seemed like a riskless yield with (JNK) at 18% last year doesn’t seem like such a bargain now at 10.8%. Use the current strength in the equity market to take profits at these very rich prices. When credit quality once again becomes an issue, these will be the first securities to drive into the ditch.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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More heartwarming news on this front:
Dividend Deals Most Since 2007 as Loans Heat UpBy Emre Peker
Sept. 28 (Bloomberg) -- Speculative-grade companies are borrowing to finance dividend payments to their private-equity owners at the fastest rate since before the credit crisis, taking advantage of investor demand for high relative yields.
Banks arranged or started marketing $8.77 billion of high- risk, high-yield loans slated for shareholder payouts this quarter, bringing 2010’s total to $17.1 billion, more than five times the amount of the past two years combined, according to Standard & Poor’s Leveraged Commentary and Data.
Private-equity firms, facing a jump in taxes on capital gains next year and a slumping market for initial public offerings, are saddling their companies with more debt as the U.S. economic recovery slows. Last week, landscaping company Brickman Group Holdings Inc., which is owned by Los Angeles- based Leonard Green & Partners LP, started raising $550 million of loans to refinance debt and pay a dividend.
“We’re going to see record-breaking transactions as the fourth quarter rolls in,” said Robert Willens, president of Robert Willens LLC, who previously was a managing director in charge of tax and accounting analysis at Lehman Brothers Holdings Inc. “Companies are in the process of setting up dividend programs now so that they can get them implemented by the end of the year.”
Tax Increase
Taxes on dividends are slated to jump to 39.6 percent next year from the current 15 percent, which was adopted in 2003 by former-President George W. Bush and a Republican-controlled Congress. President Barack Obama’s budget, sent to Congress Feb. 26, would limit the increase to 20 percent.
Dividend deals make up 11 percent of this year’s $161 billion of institutional leveraged-loan issuance, double last year’s total and $3.86 billion more than in 2008, according to S&P LCD.
S&P 500 FINANCIALS INDEX - an important chart:
http://stockmarket618.wordpress.com
"What seemed like a riskless yield with (JNK) at 18% last year doesn’t seem like such a bargain now at 10.8%."
It may not seem such a bargain to you but what about all the chumps still sitting in governments?
Good advice, but to the wrong crowd.
oh, yeah...junk you say? one problem with persistently low interest rates is "bankruptcy." in short: "junk gets junked." the "penny stocks of bonds." with rates on muni's hitting 2% it makes you wonder: where the phuck is the god-damn recovery. these are MASSIVE capital gains in bond funds so, sure--it's the biggest bubble since...i don't know, in debt markets? i've never heard of a debt bubble before actually. needless to say "the world is envious" since "here we go again." first it was tech. then it was real estate. now it's fixed income. the key here of course is "it must be ridiculous." which of course has been an mantra of mine...RIDICULOUS! In short "welcome to your real support for equities." Trading profits gained from a ridiculous market in fixed income is being used to support equities. Wait 'till we hit ludicrous speed, Captain. That's right...LUDICROUS SPEED.
every type of junk is extremely popular lately.
http://covert2.wordpress.com
is there a bathing suit in there somewhere?