phillips49

Speculative-Grade Winning Streak Continues

Why I bought "junk" and still own it.

It boils down to risk/reward.

All investing is speculative. Last year proved it very painfully. The market suddenly collasped from under all asset classes with the credit market freezeup, giant liquidation sale and rapid leveragaging of the investment markets. Money moved into "safe" investments. Treasuries became over bought and yields dropped to zero as investors just tried to keep what they had. At that point even treasuries became a risk ,since they would have to eventually unwind as well as fear faded.
The current yield on"safe" 5 year bonds is 2.49%. I use 5 year since that is the maturity of the junk I own. Junk pays 800 basis points more. The yield has held up remarkably well through the financial crisis. The default rate fears have not materialized. So cash money is paid every month. "cash", real money in the till! And it comes monthly, not quarterly or semi-annually.
As financial markets stablized and some confidence returned and the underlying value "NAV" has also increased by 25% showing some confidence in the unlaying assets.
I suspect that with the tightening of lending standards, companies can ill afford to default on bonds. Who will buy a bond from a company that has a history of default. Who will lend a company money with a poor credit record. Bond holders also have quite a significant say, even in bankruptcy. To wit the role of GM bondholders.

Inflation is not a short term concern.

The stock market is a little ahead of itself at the moment anticipating the end of the recession. Earnings have been achieved by cost cutting to which there is a limit. Growth has not been demonstrated, just hoped for. So in my view it would be a bad time to jump in..downside risk. Treasuries at this point also have more downside risk that upside potential.
Junk may still have some upside potential left. I use September 1 2008 as a benchmark for fair price on these assets. So if the market goes down, I still get 10-13% cash every month. If the market goes up I get the cash and the increase in NAV as well.

Everything is all about debt at the moment, so why not invest in it? You don't have to worry about P/E, new product lines, competition or the cost of goods. Debt is owed money. Pay it back!

I suspect that since bonds performed better than stocks in the last decade, that the baby boomers are now moving into fixed income as they approach retirement.

Of course there is always cash, but then again no pain, no gain.

Why I'm Lowering My Bond Exposure

You'll never go broke taking profit, but I'll hold a while longer myself. The ETF throws off 10% cash every month that I've used to invest in stocks. The dividend held steady during the financial crisis. The NAV has risen some 24% since the first of the year, which indicates that investors have some confidence in the underlying bonds. HYG currently sells at 1% premium to NAV which is not over priced. The equites market is over bought at this point and I don't see a good place to park the cash. I'm thinking that stocks are more of a risk at this time than HYG.

Stocks / Bonds Intermarket Considerations

Old Trader,

As I understand the author, rising below grade bond prices as related to investment grade bond prices, indicate improving economic conditions. Comparing the price divergence of LQD to JNK since the 1st of March, shows rising below investment grade bond prices.
Not being bearish, to me doesn't necessarily mean bullish either. To me it means bearish is increasingly risky. Cautiously optimistic would be more appropriate.

Stocks / Bonds Intermarket Considerations

Thanks,

Good article. The last 30 days do show the divergence you speak of between investment grade and below investment grade bond prices (using JNK and LQD as proxies) and is also coincident with upward movement of stock prices. This would indicate improving economic conditions. Bearish is wrong place to be.

Don