Question for the group: Is now a good time to hop on high-yield bonds? Seems that with the equity uncertainty, and credit spreads being so high, this may be a good oppurtunity…thoughts?
High yield has been performing similar to equities. As it historically does. If you think there will be a rebound, either asset class is a good investment. If you think we will continue to plummet, then no opportunity.
My gut continues to say some of this stuff is priced way wrong. Had a talk with an old friend and WaMu manager yesterday and she said exactly what I’ve been thinking. Yes they are having defaults but they are selling a lot of this stuff, even in the current housing market, at a gain!! She also thought the govies could end up with a gain long term buying this “toxic crap”…although would probably squander it will. Looking at the prices on some of these securities it just doesn’t make sense to me, what is half the stuff gonna default and the property sold at a 100% loss? Maybe someone more quant-y than I has some thoughts or math to share.
I think there are plenty of opportunities in that arena. Or not even high yield for that matter but just corporates. Spreads are at all time highs, if you can snatch up some companies that you feel will weather the storm(and there are plenty nonfinancials that can/have survived downturns) then I think you can grab a nice yield…with that said, right now, who knows…
It really depends on the security. Many HY bonds issued over the last few years were extremely covenant light. What this means is that there is nothing to trip an event of default, which allows the company to chug along while burning through cash to the bitter end. At this point, there will be nothing left to recover. So in these cases HY Bonds should be viewed in effect as equity…and we all know what happens to equity holder when a company goes belly up.
I have been looking at some HY close end funds that holds corp bonds. Some are selling at more than 20% discount of NAV, which is already priced at all time spread. Assume 0.4 recovery rate, the discount will provide extra downside protection of 40% of portfolio default. I’m buying for my 401K.
I think your 40 recovery will be high. Adjust that lower. Lots of loans on the books this time around which should handicap recoveries. My guess is 25 is probably a more reasonable expectation. Just my gut.