Hoping to keep track of the junk bond market as things are looking a little dicey there BofA Merrill Lynch US and Global High Yield Indices http://cbonds.com/indexes/indexdetail/?group_id=153 30.11.2014: 4.67% (+2.41% monthly change) (positive = bad)
09.12.2014: 5.06% If it keeps climbing like this it's only a matter of time before it forces a broader market sell off of the S&P and Dow
Article explaining the impact of the widening yields and the higher risk of default which could spread throughout other areas of the economy, in particular the finance sector http://www.ipe.com/news/asset-manag...-default-risk-takes-hold/10005460.fullarticle
Not sure of this? If oil price is lower for longer, this will blow out energy junk bond yields, but also reduce a major expense across most s&p companies.. Increasing profits (and overall gdp) I wouldn't have thought energy junk bond market is big enough to be systemic risk for finance companies is it?
From what I've read, energy makes up roughly 20% of the entire junk bond market. This has surged in recent years with the shale gas boom in the US. Also at least the HYG ETF has been used previously as a guide to US share market corrections. Whilst it doesn't have a 100% success rate, when it does fall, a broader market sell off is generally not far behind. At the moment it is at a 52 week low.
He's back! Wearing sunglasses to block out any natural light High Yield Debt Plunges" So I guess he's not talking about the yield but the price on the high yield debt?
Assuming I've got the HYG etf chart I can't see a signal from it to predict the GFC in stocks. Let's say the GFC in hindsight started in Nov 2007 - That's the GFC as it affected stocks I mean. Looking at the ishares High Yield Corporate Bond etf (code: HYG) it was in a choppy mild downtrend before this but it's hard to see cause for alarm. There's not a lot of history in the etf at that time if this all data chart is accurate. The etf only really cratered in Sept 2008 that I can see - when the GFC was in full flood. I'm not debating for the sake of it. I would like a leading indicator for a stock market correction/crash. I can see that much more volatility and high volume has come into HYG lately on weekly chart
I'm just going off what I've read elsewhere. Technical analysts keep a close eye on the sector to gauge risk appetites and the health of credit markets. Considering high yield debt is more riskier than shares, investors generally dump high debt before they dump shares in a risk off atmosphere.
This stuff really interests me and one thing puzzles me ----> the correlation between low oil prices and the junk bond market. What I don't understand is why do falling oil prices affect junk bonds? Or put differently, why would the junk bond market potentially crash because of low oil prices. Here's my theories (am I right?): Theory 1 For example, say I bought a $1000 10 yr bond from Company A (e.g. BHP) at a 10% interest (i.e. coupon) rate....that means for 10 years I'll get 10% interest paid yearly and also get my $1k back at a 10 year maturity date. So what do I care if oil prices drop? I mean yes, I get that low oil prices affect the profits of producers such as Company A, which in turn impacts their bottom line, but if I'm already locked into my bond rate, then I'll receive interest regardless of how profitable Company A is. So why would this 'crash' my bond? Theory 2 Or is the impact of low oil prices related to future 'junk' bonds only? That is, if low oil prices influence company profitability (e.g. a producer like Company A), then there is less capacity to offer an attractive coupon rate on new bonds? Therefore if the rate is crap, you'll attract less buyers for your bonds, so finance will be harder to come by.....and if you can't get new finance, then as a business it makes things very hard.....so is this what they mean by bonds 'crashing'? Grubes
Oil companies with junk status or that have since been downgraded to junk status issuing corporate bonds to help fund their projects. When the yields of these bonds widen (due to the falling oil price and the dumping of these bonds) it increases the interest payments required by the company to pay back the debt making it harder for them to do so. Given the energy sector makes up roughly 20% of the junk bond market in the US, mostly because of the recent shale boom it would impact the rest of the junk bond market then the hedge funds and energy finance companies that buy these bonds. By the time it reaches this point, the rest of the market, in particular the finance sector that has exposure to the hedge funds and the energy finance companies and any other financial company that has exposure to the rest of the junk bond market will begin to stress.
Thanks for the reply. I think I'm slowly getting this. You say: By yield, I'm assuming you mean the difference between the US Treasure Bond rate (which is the benchmark right?)? Btw, I Googled it (investopedia.com) and it says that on average junk bonds have a 4-5% margin on top of your TBond. I have a few questions: - Who sets the junk bond interest /coupon rate in the first place? Is it determined by the market somehow or some ratings agency, e.g. Moody's? - Why and how does the 'dumping' of junk bonds increases interest payments? Is 'dumping' related to the inverse relationship between bond prices and interest rates? That is, if interest rates on NEW (i.e. yet to be issued) junk bonds widen (meaning the rates go higher), then holders of EXSITING bonds would want to 'dump' them (i.e. sell at a discount?) in order to get in on the action of the NEW bonds (which have a higher / more attractive rate). Is that right? if so, then I still don't get why this so-called 'dumping' of EXISTING bonds affects the company itself? I mean, a company still has to honor the rate of any EXSITING bond, which is set for life, regardless of who holds the bond (i.e. the original lender or some other schmuck) or how many times its been re-sold in the market or sold at what price as far as the company is cornered, it has a contract on a bond somewhere that it needs to honor with interest payments and the eventual maturity date. With NEW bonds, however, I get that's a different kettle of fish; for if yields widen, then a company is forced to issue NEW bonds at a higher rate..so as you say, it would get more difficult to pay the higher interest. Grubes
From the time bonds are issued until the date that they mature, they trade in the open market. As a result, yields converge to the point where investors are being paid approximately the same yield for the same level of risk. Because junk bonds have a higher degree of risk associated with them, they command a higher margin to cover that risk. The theoretical price of each bond is calculated over a range of interest rate offsets to the prevailing treasury yield curve. As the interest rate offset increases, the bond price decreases and vice versa. If the interest rate offset decreases, the bond price increases. Credit agencies like Moodys and S&P issue credit ratings on bonds when issued and also they can change the credit rating based on company's performance and exposure to risks. In this case energy bonds are obviously exposed to the dropping oil price. A change in either direction by the credit agencies will generally cause the bond yield to widen or tighten. Junk bonds are simply a more risky investment so when dealers dump bonds they are simply reacting to a risk off atmosphere in the market, the same as an investor would dump shares because the share market is selling off. The company does have to honor the rate of the existing bond, so long as the company can pay for it and not default. Something which investors in the junk bond market would be especially concerned about.
