Are Junk Bonds Peaking?

|
Includes: HYG, JNK, TLT
by: Mad Hedge Fund Trader

Summary

There is no happier corner of the fixed income universe than junk bonds, which have been soaring like a bat out of hell recently.

Average yields for the bond class most sensitive to the economy have collapsed from 18% to near an all-time low of 6.68%.

If you look at the chart for JNK it virtually tracks the S&P 500 one for one, with less volatility, and therein lies the problem.

When bonds act like stocks, what happens to bonds when stocks go down?

There is no happier corner of the fixed income universe than junk bonds (NYSEARCA:JNK), (NYSEARCA:HYG), which have been soaring like a bat out of hell recently.

Average yields for the bond class most sensitive to the economy have collapsed from 18% to near an all-time low of 6.68%, a scant 483 basis points over ten-year Treasury bonds (NYSEARCA:TLT).

If you look at the chart for (JNK), it virtually tracks the S&P 500 one for one, with less volatility, and therein lies the problem. When bonds act like stocks, what happens to bonds when stocks go down?

That is a particularly pertinent question these days as stocks have more than doubled from the bottom, and are approaching grotesquely overbought levels. After a move in the S&P 500 Index's average multiple from 9 to 19, with 20 a possible top, are junk bonds peaking out here as well?

A 483 basis point premium does not sound like much compared to the historical range. Is it pricing in the near absence of risk in this paper, as if they will live forever? When did I last see this movie? 2006? 2007? Alas, how short memories have become.

It might be worth taking some money off the table here, and taking the hit in the cash flow in your portfolio.

Lowering your beta is prudent, especially if we are about to move from a 'RISK ON' to a 'RISK OFF' world for more than a day.

No doubt, much of the juice in junk bonds' recent moves came from Ben Bernanke's QE, the effects of which are now fading into history.

Do you really want to wait for the music to stop playing before you grab a chair?

JNK
HYG

Childrens Game

Time to Grab a Chair Before the Music Stops Playing?

Truck Antique

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.