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Should you invest in junk bonds right now?
The recent market volatility, combined with the relatively benign rates outlook, also means buying opportunities for the more risk-savvy investors.
The average bid price of leveraged loans touched a low of 95.7% of par on October 16. This was the lowest level since December of 2012.
Last week marked the fourteenth straight week of outflows from leveraged loan mutual funds.
In the week ending October 17, U.S. leveraged loans issuance came in at $6.4 billion across 10 issuers. This was a 40.2% week-on-week decline.
Investors have been very quality conscious, even with junk bonds this year. The higher volatility has not impacted higher-rated junk bonds.
High-yield debt mutual funds recorded a net outflow of ~$0.5 billion in the week ending October 17, reversing the previous week’s trend with net inflows of $1.3 billion.
In the week ending October 17, there was just one new issue in the U.S. junk bond (JNK) market, which totaled $0.5 billion.
Higher volatility in markets often helps in establishing a new price equilibrium, which may be especially true of high-yield bonds.
Select commercial mortgage-backed securities and non-agency mortgages continue to look attractive given today’s low-rate environment.
While munis are no longer cheap on an absolute basis, they remain relatively attractive, especially long-end muni bonds. Plus, the sector looks compelling given improving issuer credit conditions and higher tax revenues.
The 10-year Treasury yield’s recent move has high yield bonds looking more attractive on a relative basis. Earlier in the year, high yield levels sat at 5% vs. 2.5% for the 10-year Treasury.
The 10-year Treasury yield still appears attractive relative to sovereign rates elsewhere in the world. In addition, longer-dated Treasuries also look more attractive than those with two- to five-year durations.
In part, it’s the very low rates in places like Europe and Japan that have increased demand for long-term bonds in the United States, supporting their prices and helping to keep yields low.
It’s clear that yields are likely in for a rocky ride as seasonal factors and technical unwinds of crowded positions play out in the weeks ahead, and as we get closer to a Fed rate hike.
And though the 10-year yield recovered somewhat Thursday as Treasury prices dropped, Wednesday’s dip below 2% came as a surprise.
It was hard to miss the headlines last week about the 10-year Treasury yield dipping below 2% Wednesday, hitting its lowest level in over a year.
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.