Investing
The Junk Bond Bubble May Have Peaked (JNK, HYG, VYM, PHK, HYV)
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The good news is that you don’t have to panic. Hopefully, at any rate. This high-yield and high dividend bubble will not likely burst like some other classic bubbles (i.e. the dot-com bubble of 2000). That being said, investors may still be taking on far more risk than they understand compared to traditional bond funds as this has become a very crowded trade now. The move into junk bonds and high dividends has been a trade that investment managers and savvy investors made back to early 2011, throughout 2011, and into 2012.
Can the move continue? Sure, but our take is that the easy money has been made and that the price action indicates that junk bond spreads may have gotten too tight over the last two weeks. We track the speculative composite spread almost each and every day and we have seen the composite index spreads widening even as some junk-bond issuers are scoring debt offerings at record-low yields.
S&P’s headline spread data showed that the speculative-grade composite spread reached a low of 589 basis points back on September 21 and that spread has risen by almost 30 basis points since then.
SPDR Barclays Capital High Yield Bond (NYSEMKT: JNK) is trading up 2-cents at $40.00 today against a 52-week range of $35.14 to $40.81. That high came on September 18 and shares have pulled back about 2% since. The implied yield of this very liquid ETF is about 6.6% as of today. The iShares iBoxx $ High Yield Corporate Bond (NYSEMKT: HYG) ETF is also liquid and its gain of $0.22 to $92.11 compares to a 52-week range of $80.73 to $94.04.
The Vanguard High Dividend Yield Index ETF (NYSEMKT: VYM) is up $0.18 at $50.78 against a 52-week range of $39.87 to $51.41. This ETF is down just over 1% from its high and the indicated yield is “only” 3.1% here as this is a high stock dividend fund rather than a high-yield bond fund.
The PIMCO High Income Fund (NYSE: PHK) is a closed-end fund and the $0.05 drop today to $14.12 compares to a 52-week range of $10.90 to $14.32. We would not that this has a monstrous premium to its net asset value due to leverage here. Still, the current dividend yield is indicated around 10.3%.
BlackRock Corporate High Yield Fund V, Inc. (NYSE: HYV) is another fairly active high-yield bond fund and the $0.03 drop to $13.26 is against a 52-week range of $10.26 to $13.58. Its dividend is approximately 8.1%.
Here is how the tightening report dates have gone (headlines copied from Dow Jones over last 45 days):
Earlier in the summer these spreads had widened out to over 700 basis points.
JON C. OGG
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