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For High Yield Bonds, Is "Frothy" The New "Irrational Exuberance"

Tyler Durden's picture





 

Barclays index of high yield bond total returns is now 63% higher that its pre-crisis peak. This compares to an equivalent total return index for the S&P 500 was only 12% (and it has yet to break the October 2007 highs). These numbers are astronomical in the face of micro- and macro-fundamentals and while equity markets remain the policy tool du jour for the central planning elite, it appears they are perhaps starting to become a little concerned that driving all the retiring boomers 'safe' money into risky bets may not end so well. Just as Alan Greenspan stepped on the throat of equity markets with his now infamous 'irrational exuberance' speech, we wonder, as Bloomberg notes, if last night's speech to the Economic Club of New York by Bill Dudley is the new normal equivalent, as he noted, "some areas of fixed income - notably high-yield and leveraged loans - do seem somewhat frothy," just as we warned here. With the high-yield index trading at 5.56% yield - the lowest in over 25 years and loans bid at 98.27 (the highest since July 2007), perhaps he is right to note, "we will need to keep a close eye on financial asset prices."

 

 

Source: Bloomberg

 


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Tue, 03/26/2013 - 18:49 | Link to Comment JeremyWS
JeremyWS's picture

bullish, I'm sure.

Tue, 03/26/2013 - 18:55 | Link to Comment DJ Happy Ending
DJ Happy Ending's picture

I have been long PHK for 10 years and have made a fucking KILLING, hedged with Au & Pb of course

Tue, 03/26/2013 - 20:46 | Link to Comment Cult_of_Reason
Cult_of_Reason's picture

Re: "I have been long PHK for 10 years and have made a fucking KILLING"

Ten years ago, in 2003, PHK was at higher level (~$15) than it is today (~$12).

You are ~20% underwater in nominal terms and ~36% underwater in real terms (using BLS underreported inflation numbers), but you are even much deeper underwater if you consider real inflation.

 

Tue, 03/26/2013 - 21:18 | Link to Comment machineh
machineh's picture

DUDE -- people buy PHK for Y-I-E-L-D

You are quoting its price index, not its total return with reinvested dividends.

Do you even know how to calculate total return? (Not that many people do, although it's just arithmetic.) 

Although Yahoo Finance total return indexes often have errors, Yahoo's "adj. close" TR index indicates that PHK has almost TRIPLED in 10 years:

http://finance.yahoo.com/q/hp?s=PHK&a=03&b=28&c=2003&d=02&e=27&f=2013&g=m

 

Tue, 03/26/2013 - 22:29 | Link to Comment Cult_of_Reason
Cult_of_Reason's picture

DUDE,

First, in real terms (adjusted for BLS reported inflation) and with reinvested dividends PHK has DOUBLED (not TRIPLED) in 10 years (2003-2013).

Second, using the same apples-to-apples dividends included comparison, S&P 500 with reinvested dividends has DOUBLED (122%) in 10 years (2003-2013); or 76% adjusted for inflation total return.

Third, outperforming S&P 500 by 24% over 10 years, or by 2.4% a year, is far from making "a fucking KILLING" (unless you are Denis Gartman who mysteriously buys assets in Zimbabwe dollars or in Roman Denarii and always makes "a fucking KILLING").

 

Tue, 03/26/2013 - 18:50 | Link to Comment icanhasbailout
icanhasbailout's picture

must... resist... Rick Santorum... reference...

Tue, 03/26/2013 - 18:51 | Link to Comment fonzannoon
fonzannoon's picture

holy shit look at that chart....look at it!

Tue, 03/26/2013 - 21:11 | Link to Comment StarTedStackin'
StarTedStackin''s picture

the colors man......the colors

Tue, 03/26/2013 - 18:52 | Link to Comment LawsofPhysics
LawsofPhysics's picture

85 billion per month, indefinitely.  All you have done here is identify but one of the counterparties that benefits.   Wake me when the printing/monetization stops.  But this is a rhetorical question as most likely the bombs that will be falling will wake most of us anyway.

Tue, 03/26/2013 - 19:00 | Link to Comment fonzannoon
fonzannoon's picture

correct Laws, put that chart up against DVY or HDV etc and u will see the same froth in dividend paying stocks...but of course they won't be affected at all  adversely because they are stocks...and therefore always undervalued and excellent buys at any time

Tue, 03/26/2013 - 19:50 | Link to Comment Professorlocknload
Professorlocknload's picture

So, does the 30 hit 160?

Tue, 03/26/2013 - 19:05 | Link to Comment fourchan
fourchan's picture

what could go wrong, perpetually up is the only direction for ponz paper.

Tue, 03/26/2013 - 18:53 | Link to Comment Piranhanoia
Piranhanoia's picture

"If it is Barclay's,  it is bullshit"

Tue, 03/26/2013 - 18:59 | Link to Comment ziggy59
ziggy59's picture

Bonds... Shaken, not Stirred

Tue, 03/26/2013 - 19:00 | Link to Comment 1C3-N1N3
1C3-N1N3's picture

Those sequences of data points are somewhere in the digits of pi.

Tue, 03/26/2013 - 19:17 | Link to Comment NoWayJose
NoWayJose's picture

The big question for the Life of Pi is whether you want to be trapped in a small boat with a Bengal Tiger or with the IMF's Lagarde. Both are good at tearing things apart...

Tue, 03/26/2013 - 19:43 | Link to Comment Yancey Ward
Yancey Ward's picture

I choose the tiger- that Lagarde is all gristle and leather by the looks of it.

Tue, 03/26/2013 - 19:14 | Link to Comment Yen Cross
Yen Cross's picture

     That isn't your ordinary volcano folks. That's an extinction level event, when she blows.

Tue, 03/26/2013 - 19:39 | Link to Comment FieldingMellish
FieldingMellish's picture

If it yields, it can be killed.

Tue, 03/26/2013 - 19:44 | Link to Comment Yancey Ward
Yancey Ward's picture

Lots of room between 5.56 and 0.

Tue, 03/26/2013 - 19:47 | Link to Comment khakuda
khakuda's picture

The Fed should get a Nobel prize in bubble formation and capital misallocation.

Tue, 03/26/2013 - 19:48 | Link to Comment akarc
akarc's picture

Yo "LawsofPhysics", how does that for every action there is an opposite reaction gig work? How long before gravity says enough?

Tue, 03/26/2013 - 20:21 | Link to Comment They Tried to S...
They Tried to Steal My Gold's picture

This has an ugly finish ......reminds of Oil at $141...

Tue, 03/26/2013 - 21:06 | Link to Comment machineh
machineh's picture

This compares to an equivalent total return index for the S&P 500 was only 12% (and it has yet to break the October 2007 highs). 

The statement in parentheses is incorrect.

In March 2012, the S&P total return index exceeded its Oct. 2007 high. It is now 12% ABOVE it.

Tue, 03/26/2013 - 21:07 | Link to Comment andrewp111
andrewp111's picture

It looks like it has been pretty consistent, except for the blip around 2008-9. If the slope changes and it goes vertical, watch out !!!

Tue, 03/26/2013 - 22:31 | Link to Comment Registered Inve...
Registered Investment Advisor's picture

We are long high-yield still.  For months and months I have had to hear about "the great rotation" and the impending bond bubble, but we have continued to get 5.5% from HYXU plus capital appreciation.  A lot of people are shocked at how the bond market is saying "NO" to the recent rally.  Tell me again where the 10yr is at?  Under 2% you say?  VIX is at what, -8? LOL  We will rotate out of bonds when the Bernank is done printing, we will rotate out of everything at that point and hold a basket of currencies and physical. You would be shocked at the amount of wealthy investors holding 5% in physical. 

Tue, 03/26/2013 - 23:35 | Link to Comment NoDebt
NoDebt's picture

Series 65 (amongst others), same here.  Welcome to the party.  Nobody loves junk more than me (posted here about it here including my ins-and-outs many times).  I've ridden it to a straight-up double and more since 2009 and I didn't even get in at the lows.  I missed that party for almost 2 quarters and still beat it like a rented mule since then.  It just won't die, let alone "rotate" into equities.

So, you know the gig- you just can't put a huge percentage of your clients' portfolios in that stuff.  Reasonable standards of diversification, risk-adjusted returns and all.  But that doesn't affect what I can do with my OWN money.  I was WAY overweight in it since 2009.  WAY OVER.  Record low default rates on junk and that juicy yield.  Oh, the yield!

I fear, however, we may be nearing the point of "picking up dimes in front of a steamroller" at this point.  I'm back to a relatively slim "target" allocation right now with my own money.  Agreed, it's going to end when the Fed pulls the plug but I'd rather be a year early than 1 day late in this case.  The risk/return is doing a serious flatline right now.  I'd rather miss 10% upside over 2 years than getting hammered 10% down in a quarter.

"You would be shocked at the amount of wealthy investors holding 5% in physical."  No, actually, I wouldn't.  Shhhhh..... quietly, please.  Quietly.

Welcome to the party, my friend.  You were brave for posting.  Most in the biz never do- they just read here.

Tue, 03/26/2013 - 23:46 | Link to Comment sablya
sablya's picture

Does anyone here have a clue what is going on in the corporate bond market, especially regarding the Dorchester Capital Markets Index for Bonds, $CPMKTB?  It has plunged 40% since mid-December and doesn't seem to slow down.  

http://stockcharts.com/h-sc/ui?s=$CPMKTS&p=W&b=3&g=0&id=p76487234603

I'd appreciate it if anyone can shed some light on this thing.

Wed, 03/27/2013 - 07:55 | Link to Comment Chippewa Partners
Chippewa Partners's picture

Dorchester, now that is a name out of the past.  Does anyone remember Mike Pokorny who ran high-yield at Delaware?     I think Cigs killed him but when I worked at Drexel he wouldn't touch a DBL bond if it were coated in gold.   Maybe the best high-yield manager to ever walk the planet.    

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