Guest Post: Junk Bond Investors - 'Garbage for Brains'?

Tyler Durden's picture

Via Pater Tenebrarum of Acting-Man blog,

The WSJ asks whether junk bond investors have 'garbage for brains'. The short answer is probably yes. They do it every time – i.e., they buy more junk debt than ever at precisely the riskiest points in the cycle. Naturally this can go swimmingly for a good while, but as a general rule of thumb it is far better to buy such risky paper when the compensation one gets for taking the risk is actually adequate. It certainly isn't adequate at the moment, and yet, junk bond issuance has reached a new record high this year.

[Via ZH...


HY Spreads appear near their long-run average (though obviously well off cycle tights)...



but leverage is rising rapidly once again...



and all we have done is extend/roll maturities...



In spite of investors' bitter experiences with such exuberance, the cycle repeats over and over again. The driving force behind it is the central bank's easy money policy – which brings the sugar highs of today, but also the hangovers and steep losses of tomorrow. The WSJ gives us a little reminder of a similar episode that occurred in the distant past:

“Consider the wise words of Jules Bogen, editor of The Journal of Commerce, who explained the infatuation of individual investors with junk bonds this way:


The extreme easy money policy of the past few years has tended to drive down sharply the yields of the highest grades of bonds as financial institutions, particularly banks and insurance companies, have sought to obtain desired investments from the limited available supply. As a result, individual investors, accustomed to 5 and 6 per cent yields or more from their bonds, have had little incentive to purchase these high grade new issues.


Pause for a moment and let this sink in: Bogen wrote that passage in the March 1938 issue of the Journal of the American Statistical Association.


The markets have seen this movie before – long ago.


That doesn’t mean the movie is going to have a happy ending this time. But who is acting irrationally? When the Fed gives individual investors little choice but to take extra risk, whom should pundits point their fingers at? The investors? Or the policymakers?

(emphasis added)

That is indeed a good question.

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Dre4dwolf's picture

The govt and banks buy all this junk, and w.e investment companies are buying these things selling to their clients and then betting against  them.


Setup to fail products probably.... you need a steady supply of junk to sell your clients so that you can bet against them.

ShrNfr's picture

Buying a HY corporate bond fund from somebody like Fido is usually a fast way to lose money. Having said that, I have done a lot of distressed junk in single issues and that if you take the time and effort to understand things, you can pick off the occasional one that will make you money. You get nothing for nothing. You gotta work for it. Don't think that most institutional managers work that hard on these things, they won't. They will just take the credit agencies' ratings and their sell side reviews and load up on crap.

NEOSERF's picture

What's the worry, with the world's best consumers backstopping every assinine move the government and yield-ravenous financials make, they are free to do this again in the name of "pump-priming"...greenshootz bitchez

pitz's picture

If government debt always is considered risk-free, then government will always have lower funding costs than corporations, and thus, will be able to grow faster than corporations, to the point where the entire economy is comprised of government and corporations cease to exist.  Therefore, corporate bond buyers (who ever invented the term 'junk' anyways -- its so derogatory!), if we are to see a recovery of the health of the corporate sector, are basically betting on a scenario where corporate bonds become the risk-free instruments of the future.

Which, intuitively, makes sense -- sovereign assets cannot be seized in a default, short of war.  While if a corporation defaults on its debt obligations, the creditors can come in and scoop up the assets.  Therefore, corporate debt is actually collateralized and of greater quality than so-called 'risk-free' government debt. 

LawsofPhysics's picture

But, the U.S. is a corporation and all of it's people are tenants, so if the corporation defaults...  

NoDebt's picture

It's been a good holding for me since the crisis.  Didn't buy in at the bottom, unfortunately, but not near today's nose-bleed levels, either (or better yet, last month's nose-bleed levels!).  Default rates have been below average that whole time and liquidity was washing over everything, papering over a multitude of sins.

But as they say, "that was then, this is now."  I'm heading for the exit on this one.  Don't feel like going round-trip on the investment.  I should say it's a decision driven as much by taking LT cap gains at current rates as it is about fearing a rout in the sector.

moriarty's picture

Nice pic.

Thanks for sharing.

jim249's picture
Guest Post: Junk Bond Investors - 'Garbage for Brains'?


No, they overdosed on Twinkies.