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.