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High Yield Bond Market: An 18 Month Old Warning

Posted by kdadmin on December 15th, 2015.

High Yield Bond Market: An 18 Month Old Warning

Way back on June 26, 2014, I published this article about why we had dumped our entire high yield bond stake. Notice the black circle …

This circle indicates the point in time where a traditionally more risky investment like JNK (a high yield bond ETF) began to lag behind a traditionally more safe investment like TLT (a 20 year treasury bond ETF). In other words, you could get nearly the same return in a safer investment than you could in the riskier investment.

Now, bond returns ebb and flow. Sometimes JNK is better, sometimes TLT is better. But we knew, even back then, that the Fed would likely stop pumping money into the economy in short order (they stopped in late 2014); and we knew this would put pressure on companies heavily dependent on lower credit quality debt. So, think about it. Do you really want to bet on companies with lower credit ratings to be able to pay their debt when interest rates go up? I think not.

Worse, if we add the compounding problem of crashing oil prices to a high risk sector like oil and gas exploration (common high yield bond issuers), you have a perfect storm for the implosion of the high yield market. Since July of 2014, oil is down nearly 67%.

Oh, and lookie there, notice what happened to JNK (and the high yield bond market) since then? Down the drain. Off 19% from its high. This is not a coincidence. This is how the market works. While the recent “crisis” may make the news, the real story happened 18 months ago.

So, what’s your takeaway? Education beats sensation. Being a shrewd investor means using your education (like from the articles written on this site) to notice and heed the relevant data points that main stream media can’t be bothered to bring to your attention. Case in point. The time to sell high yields bonds was 18 months ago. Not 18 minutes ago. In other words, you either need access to this data and a way to interpret it, or you need access to someone who can.


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