Analyzing the current opportunities and risks in junk-rated debt

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High-yield bonds and market volatility

Volatility, as measured by the VIX (VXX), or the index commonly known as the “fear factor”, spiked to 25.27 on October 15, the highest level since June of 2012. Stock (IVV) (QQQ) and bond markets around the world underwent some wide oscillations, as markets tried to digest slower growth in Europe, China, and Japan.

Part 1.

How will higher volatility affect U.S. junk bonds?

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Higher volatility in markets has its own rewards. Higher volatility often helps in establishing a new price equilibrium, which may be especially true of high-yield bonds. The asset class has seen wide gyrations since late July, even before the global growth crisis blew up a couple of weeks ago. While some analysts have declaimed junk bonds as way overvalued, others see opportunities. We’ll analyze the outlook for junk bonds in the coming sections of this series.

Part 1.2

Commodities cycles

There’s also been a steep drop in commodities prices lately, notably crude oil and industrial metals. The drop in the price of crude oil was primarily due to oversupply, relative to demand. However, the commodities sector is highly cyclical. Its performance is largely dependent on global economic growth, notably in major economies like China, the Eurozone, and Japan.

Current trends in U.S. high-yield bond markets

High-yield or junk bonds are also highly dependent on economic performance. Unlike the above-mentioned economies, the U.S. economy has been on a firmer footing for many quarters now. This factor, along with an accommodative monetary policy, benefited U.S. junk bond ETFs in recent years.

In this series we’ll analyze the latest primary and secondary market trends for U.S. junk bonds and leveraged loans. We’ll also analyze the impact of recent market activity on ETFs like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), the SPDR Barclays Capital High Yield Bond ETF (JNK), and the PowerShares Fundamental High Yield Corporate Bond ETF (PHB), all of which invest primarily in high-yield debt. The next section will discuss primary market trends in U.S. high-yield debt.

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