But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
Why high yield bonds offer an investment opportunity
High yield bonds have come under pressure lately, and as a result, are now looking relatively attractive. Spreads recently widened out to the highest level in a year.
Dr. James Bullard, head of the St. Louis Fed, called for putting off the tapering of bond purchases last week. This was surprising, as several times this year he’s called for a faster timeline to increase the Fed funds rates.
Despite the auction size rising slightly, the bid-cover ratio slumped ~19.3% to ~3.7x, week-over-week. This was the lowest since the auction held on October 8, 2013. The ratio has averaged ~4.4x for auctions held in 2014.
Despite unchanged weekly supply, the bid-cover ratio declined by 14.3%, week-over-week, to finish at 4.3x. The absolute value of bids made was also lower.
The bid-cover ratio fell at last week’s auction, due to the higher supply of Treasury bills. The absolute value of bids was higher at the auction.
Market demand, consisting of direct and indirect bids, fell at October’s auction. This was due to lower bidding from indirect bidders.
The higher market volatility (VXX) resulted in major U.S. indices including the S&P 500 Index finishing down for the week ended October 17. The SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index, fell by 1.1% over the week.
Last week, the demand for U.S. Treasuries rose primarily on heightened global risks. Fears of a recession in Germany and Europe sent ten-year German government bond yields tumbling to 0.74% last week, their lowest ever.
Financials, at 60% of the week’s issuance volumes, made up the largest sectoral component. Consumer sector issuers were the second-largest category last week, accounting for 20% of the week’s volumes.
Primary market trends inform investors about the terms at which new debt is priced. These help you assess how your investments are performing in terms of yield.
This series will analyze major trends in the primary and secondary markets in U.S. investment-grade debt. Volatility, as measured by the VIX (VXX), or the index commonly known as the “fear factor,” spiked to 25.27 on October 15.
High-yield bonds—or junk bonds—are rated BB+ or below. Junk bonds are more vulnerable to economic cycles. They’re higher risk securities, but they also offer higher yields.
While no longer cheap per se after their extraordinary run in 2014, municipal bonds continue to look attractive versus both Treasuries and corporate bonds.
There are still very few bargains out there for people buying bonds, and some areas of the bond market are more vulnerable to rising rates than others.
I’m not that enthusiastic about this asset class because TIPS are currently not cheap. In fact, in this environment the real return on a TIP, i.e. how much money an investor gets back after inflation – is actually negative.
Because leveraged loans pay interest on a floating-rate basis, the continued low-rates environment of 2014 has made this an unattractive asset class for investors.
Eight of the 16 transactions related primarily to acquisition financing. There were three loan transactions each, undertaken for financing leveraged buyouts and dividend payments or recapitalizations.
A number of economic indicators released last week pointed towards improvements in the economy. The most important release was September’s payrolls report.
U.S. stock market indices were adversely affected over concerns about global growth, particularly in the European Union, China, and Japan. These factors affected both international and U.S. stocks markets.
Yields on corporate debt securities are based on a spread over Treasury securities of similar maturities. The option-adjusted spread for high-yield debt securities fell by 11 basis points over the week to 4.29%.