Strategic Briefing | 3.23.2011 | High Yield Bonds

Junk Bonds: What to Do Now
The Wall Street Journal | Mar 22
It may be time to take some junk out of your trunk. Until recently, high-yield or “junk” bonds have been on a tear, posting double-digit returns in 2009 and 2010 and sending prices higher and yields close to all-time lows. But investors are starting to pare back their appetite for risky assets. For the first time since early December, there were net outflows from high-yield bond funds last week—some $801.9 million—according to EPFR Global, a Boston research firm that tracks fund flows.
ProShares Debuts Short Junk Bond ETF (SJB)
ETFdb | Mar 22
ProShares, the Maryland-based firm known for a suite of leveraged and inverse ETFs, has launched the first ETF offering daily inverse exposure to junk bonds. The ProShares Short High Yield (SJB) will seek to deliver daily results that correspond to -100% of the daily change in the iBoxx $ Liquid High Yield Index. That index serves as the underlying for the ultra-popular iShares iBoxx $ High Yield Corporate Bond Fund (HYG), which has more than $8 billion in assets and consists of more than 400 individual junk bonds.

High Yield Debt Sales Revive as Concerns Ease
BondSquawk | Mar 22
High yield bond issuance is reviving this week after falling over 50% for the past two weeks on increased concerns about a nuclear disaster in Japan and growing tensions in the Middle-East. The amount of new issues sold fell to $2.45 billion in the week ended March 18, just two weeks after markets saw $12.6 billion worth of high yield bond sales. This week will see Intelsat issuing $2.65 worth of speculative debt in 10-12 years maturity spectrum, among many others.
Gundlach Sets the Record Straight
Advisor Perspectives | Mar 22
[Jeffrey] Gundlach [of DoubleLine Capital] said the risk premium in equities is superior now to that in the corporate bond market, and the opportunities in the junk market are especially bad. High-yield bonds, Gundlach said, are more than twice as volatile as investment-grade bonds. On a loss-adjusted basis, however, their yields are only 100 basis points higher. He said yields of 4% to 4.5% are available in the investment-grade market, and junk yields are now 6.75%, assuming no losses from defaults. “We all know that there will be losses [from defaults],” he said, perhaps not this month or next month, but certainly over the next two to three years. He said those losses would be in line with their historical rate of 4% and, assuming a 50% recovery rate, that would reduce the effective yields on high-yield bonds by approximately 200 basis points.
High Yield Default and Recovery Rate Volatility in Recession and Recovery
Fitch Ratings (via Raw Finance) | Mar 17
The U.S. high yield par default rate fell to 1.1% at the end of February, a level far below 2009’s recession induced 13.7% and also well below the long-term average annual rate of 5.1%. A low default rate, however, is not synonymous with low risk. In 2011, for example, key risks to the default outlook center firmly on factors that could derail the recovery. These include soaring oil prices, significantly higher interest rates or other funding disruptions due to risk aversion, and sticky unemployment. In this new study, Fitch examines the factors that have contributed to the recent dramatic, but not entirely unprecedented, swing in default rates, offering context relative to the longterm cyclical behavior of default and recovery rates.
Dow 20,000?
Market Anthropology | Mar 22
When I think about the Big Picture and forming guesstimates of the future (don’t fool yourself, it’s still more art than science you tin foil hat wearing efficient market theorists) – I like to look at the proportions of the contributing forces. The chart below provides and excellent example contrasting the two most recent recessions and their effects to the low-grade corporate credit markets.

Bank of America Merrill Lynch US High Yield Master II Option-Adjusted Spread
St. Louis Fed | Mar 21