Trouble Brewing in the Bond Market?

Jan.19.10 | About: SPDR Barclays (JNK)

For a short time in the 1990s the Boston Celtics were publicly traded on the NYSE and had ticker BOS. As a devoted fan I bought one share and had it sent to me. Although it was a publicly traded partnership I viewed the purchase as something neat to have, not as an investment. As a stock it did not do very well and at some point was taken private. I never cared about any of that; I wanted the certificate, still have it and will keep it forever.

In 1998 the Cleveland Indians sold shares to the public with ticker CLEV. It lasted almost a year and half before being bought out. This one did better than the Celtics stock. As best as I can tell from a Google search the shares were originally priced at $15 and the buy out came between $22.25 and $22.75. The actual certificate, one is pictured below, was much neater than the Celtics cert I have.

Manchester United stock used to trade publicly. I say used to because neither Google Finance nor Yahoo Finance know a current ticker symbol. It looks like the ticker in London was MNU and, while I know it did trade on the pinks in the US, I could not find the ticker symbol.

While Man U's stock appears to be gone the team has recently gone to the capital markets for a bond issue that has a very attractive yield; looking to be 9.25%.

I'm not a Man U fan but a lot of people are and it would not be shocking to see retail interest in the issue be pretty good. However this could turn out to be a bad idea. A site called Covenant Review found some things it did not like about the team being able to sell assets and then borrow more money that could make the bonds unattractive.

If we zoom out a little bit I think there is a more important point to take from this. We have all heard about the possibility of a bond bubble now existing. Let me just say before going on that bubble is a wildly overused word these days. There are a couple of seeds now germinating for a substantial mania: prices are very high; mutual fund flows into bond funds, versus stock funds, have been huge; and there is some talk about equities being broken.

There could be one or two things missing from the typical investment mania, however, at least for now. In other manias we have seen a huge proliferation of investment products to sate a huge swell of demand. Try to remember how many internet stock IPOs there were and how many companies whose primary valuation was based on eyeballs that grew into $100 billion market caps. This type of behavior is missing from the bond market.

Or maybe not. Maybe the Man U issue is somewhat early in the wave yet to come. In other manias new products are sold after most of a big move has occurred, that is they are sold at high prices. The 9.25% Man U is looking for might seem attractive but not long ago US treasuries could be had for 7%. If you are someone who does not want to use the fixed income portion of their portfolio as a source of volatility then new products that might be fun or cool should be avoided.

This part of the bond market can move a lot. The SPDR Barclays Capital High Yield Bond Fund (NYSEARCA:JNK) has gotten a lot of positive attention for going up 56% off of its March 2009 low. The other side of that coin is that it dropped 44% from its listing price. Some folks may want volatility in their bond portfolios but whether you do is an important question to ask yourself, especially if we are on the verge of some wave of themed or gimmicky new products. This sort of thing would be a warning sign were it to happen.

So in case it is not clear I do not think the football club's bond issue is cool.