Junk Bond Managers Are Now Buying Equities

Tyler Durden's picture

Stocks are so hot that junk bond managers want in to equity markets. Bloomberg’s Lisa Abramowicz explained the conditioning that’s led to this – simply that the performance rankings of corporate debt funds shows that those which are taking the most risk have, not surprisingly, booked the best performance in 2017. While this involved purchasing lower-rated credit instruments, in some cases, it has meant buying more equities.

Abramowicz cites two funds, firstly the Fidelity Capital & Income Fund, this year’s top-performer in high yield debt. FC&IF steadily increased its equity exposure to more than 20% earlier this year.

Secondly, the Loomis High Income Fund increased its equity holdings by more than six times between mid-2016 and early 2017, albeit from a low level.

Besides purely ignoring risk for return’s sake, we suspect that active portfolio managers are also responding to the career risk of losing funds to passive investment vehicles. In addition, we suspect some are probably adherents to the synchronised global growth thesis and bonds don’t have the same “juice.”

Abramowicz attributes the behaviour to managers seeing less value in risky credit than in equities. As she shows, the incremental yield on junk versus the yield on the S&P 500 has narrowed considerably.

Abromowicz expects this to end badly, which most of us know this to be true. We also know that this  behaviour is not confined to the wealth management sector.

The lead story on the front page of the Sunday Telegraph’s Money section at the weekend was “Insurer’s risk-taking threatens next crash.” The article cited a warning from the IMF “The International Monetary Fund has issued a stark warning about the potential for a giant shock from the industry amid some serious dangers lurking ‘under the surface’…as they battle to deliver returns against historically low interests rates…’Market risk is rising. The search for yield may have gone too far. There is simply too much money chasing too few yielding assets,’ said Tobias Adrian, IMF' s financial counsellor.”

It always brings us back to our central banking friends, who have carefully fermented twin bubbles in equities and bonds as portrayed in the following slide from Fasanara Capital (see “What To Look For If This Is Indeed A Major Bubble")

And the positive feedback loops that go with them, which support the “trending” in bull markets.

As the slide theorises, “An unstable equilibrium is a state in which a small disturbance will produce a large change.”

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BennyBoy's picture


Money from the sidelines!

CPL's picture

Actually that's the primary problem.  Bread and circuses only work if the people have capital to participate in the bread and circus paradigm which typically leads to the other problem when everyone is broke.  Paints a target on the backs of those that obviously have money.  The given history of collapse...or a better word to use is transition, is not just one of economies dropping dead and blood lines demolished to ruin. 

It's also one of banditry.  I would strongly suggest people learn how to use a gun and understand posse management/deputization of civilians.  Unsure how that works, go talk to the old farts at the legion or the people at the cop shop.

The in case of emergency charters are all part of the townships you are all in when those townships were formed.  Not surprising is the amount of documentation regarding running a township without state/federal assistance is usually in huge dust covered boxes.  At least the ones I've looked at for ghost town properties.  They will typically highlight the legal guarantees of the rights and laws of residents of those townships.  Chain of command.  Harvest season process.  School charter.  All the usual boring crap to make things run in a town independently since that's how the tier system works in civic management.  Every level federal, state, provincial, reserve, region, township is defined in a charter or legal document somewhere, the tier below it is the escape hatch from the one above it as the emergency measure.

CRM114's picture

The Roman Empire's fall can be traced back to Hadrian, who stopped invading, and thus removed the external resupply of funds which allowed the Bread and Circuses to continue. The same could arguably be applied to the USA now. If it too has passed the point of exploiting the mineral wealth of other nations, and continues to decline in creating its own wealth, then the US Bread and Circuses is doomed too.

ali-ali-al-qomfri's picture

There you go again, blaming wall builders.

perhaps there is some correlation to Trump's wall building????

China built a wall.

Any other civilization out there build a wall or at least a pile of rocks to keep out

barbarians. ;)

sodbuster's picture

Junk bond managers know! It's all junk!!!!

Rainman's picture

'The search for yield may have gone too far. There is simply too much money chasing too few yielding assets,’

           ^^^ THIS

Ink Pusher's picture

Don't miss your chance to buy unlimited CCC Catshit wrapped in AAA Dogshit at unbeatable prices !

This week's specials are:  Fancy vague pronoun refrences,Buzzwords,Paradigms and Euphemisms.

These bubbles just won't bounce baby...

CPL's picture

DOW 36000!!  BULLISH!

yogibear's picture

Limited dowside with central banks backstopping stocks.


taketheredpill's picture


The Money Quote:

"While this is somewhat concerning, it's also logical." 

taketheredpill's picture

DDJ Opportunistic High Yield Fund, which has gained 9.8 percent, better than 99 percent of its peers. As of earlier this year it had more than 60 percent of its fund in debt with CCC or lower ratings by Moody's


John Law Lives's picture

As of this post, the DJIA is now up approximately 1,000 points since the "market" close on September 26, 2017.  I'm sure that is perfectly normal...