12.04.08
Calling the Bottom on Junk Bonds
Okay, maybe it is not the bottom, but I am willing to bet that junk bonds will offer a good return on investment for those who invest now. At current yields, over 20% of the companies in a junk bond portfolio would have to go bankrupt for the portfolio to lose money. Large investors of course should pick and choose, avoiding bonds issued by private-equity backed companies. For smaller investors, the JNK ETF may be worth considering. It currently has a 19.99% SEC yield. The NAV at yesterday’s close was $27.22. I may buy a small bit of JNK in the near future.
Disclosure: No positions.
Nightly (Value) Investment Links #40 | Simoleon Sense said,
December 4, 2008 at 3:52 pm
[...] Calling The Bottom On Junk Bonds – Via Goode Vaue [...]
Miguel Barbosa said,
December 4, 2008 at 4:16 pm
Hi,
Great post. I don’t normally believe in macro calls but I think your right. There are some great bargains to be found in junk bonds. Seth Klarman also is investing in junk bonds and thinks they are better than stocks.
Thanks for the great post. We have linked to it in our nightly value investing links at SimoleonSense.com
Best Regards
Miguel Barbosa
http://www.simoleonsense.com
michael said,
December 4, 2008 at 4:32 pm
Thanks for the kinds words and link! I like your blog’s eclectic focus.
If I’m going to get some linked traffic, I should make be a little more careful and point out that to calculate returns on a high-yield bond fund you really need to model defaults more than a years out as well as recoveries on defaulted bonds. Depending on when defaults happen and recovery rates on defaulted debt you could see really high (40% or more) defaults and still earn a decent return. On the other hand, if many bonds are PIK toggle bonds and companies start doing PIK payments, then it would take a lower default rate to ruin your returns.
The great things about distressed bonds are that you are buying them so far under par that your recovery rate (as a percentage of the amount you pay for the bond) goes way up and if a company does not default then you get some spectacular capital gains.
Yngvai said,
December 10, 2008 at 12:07 pm
OT question….does reserving shares on IB actually work? I know about putting in a high limit order and then changing it later in Thinkorswim, but I’ve tried that in IB before and I’m not sure it actually does anything. Do you know? If it does work in IB, then I would’ve reserved shares of CPY today when they were still available
michael said,
December 10, 2008 at 12:12 pm
Yngvai – I don’t think it works. I got my shares of CPY from my other broker (through Goldman) which allows reserving shares. I’ve tried reserving on IB by placing a high order and it never seems to work. Muddy seems to think it works.
Yngvai said,
December 10, 2008 at 1:19 pm
Michael,
Thanks for the response. I talked to the people at IB and you’re right, it doesn’t work.