Junk Bonds’ Fire Is Poised To Fade

Junk Bond Yields Peaked

See Full Image At WS Journal

Is this a sign of peak low rates? Junk Bonds, the highest risk/ highest yield segment of the bond market, has been on a tear over the last year, and those gains (price increase/ yield decrease) roared on in the first days of 2013.

Bond yields have been marching steadily down- the chart on the left shows the prices rising up up up.

One has to ask, in this marketplace of compressed yield and increased frothiness, why jump into a junk credit yielding 5% when you can lock in a 5+% yield from  the likes of Met Life, NY Life, or Allstate?

These are companies with rock solid credit ratings, hundreds of years of operating history, massive reserves, and solid operations…

If you’re a buyer of junk bonds, you are either buying with an intent to hold to maturity, or you’re buying in full knowledge that you will likely loose money when you go to sell.  If you’re not aware of these two distinct possibilities, then perhaps the junk market is not the right place to be now?

Take another at the high yield but SAFE investment in the form of Secondary Market Annuities – a great fixed income alternative.

Of course, if you’re interested, give us a call.

The original WSJ article is here.


A Happy New Year? Not For Bonds


WSJ bond prices chartA recent Wall Street Journal article highlighted the Russian Roulette investors are playing in the bond markets.  The slightest upward tweaks in interest rates sends bond prices falling… and when prices fall, you lose money if you have to sell.  Bond buyers nowadays need to be making a ‘yield to maturity’ play, and plan on holding whatever they buy for the duration.

Case in point:

In the first two days of the year, prices for the benchmark 10-year Treasury have tumbled, sending the yield above 1.9% intraday Thursday, the highest level in eight months.

The article continues along with this intriguing piece:

The sudden moves have put investors and analysts on guard. Some are beginning to question whether Treasury yields, which have been stuck between about 1.60% and 1.80% for the past six months, may kick higher. Some wonder if they may even soon surpass 2%, a level they haven’t breached since last April. Many investors have been reluctant to bet against long-term Treasurys, in large part because the Fed has been such a big buyer of the debt and because intermittent shocks over the past few years—from worries about the U.S. economy to Europe’s debt crisis and troubles in the Middle East—have consistently sent investors scurrying to Treasurys for safety.

That has helped propel the bull market in Treasurys into a third decade.

Read that carefully- the FED is the largest buyer of the Treasury debt, keeping the rates artificially low and stable, and propelling a bull market in treasuries into a third decade.

Snake, eating its own tail?  How long can the charade last?

In a totally unrelated section of the paper, Rich Karlgaard, an excellent write at Forbes, had a WSJ editorial about Ponzi schemes.  He focused on Herbalife, but I suspect his keen and penetrating intellect could rip the Fed/Treasury farce apart.  We might not like what he has to say however.

Read Rich’s article here- it’s good.
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