Junk Bond Risk Premium Falls Below 400 Basis Points and Today’s Other Top Stories

December 31st, 2013 by

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Michael Aneiro at Barron’s reports today that the average junk-bond risk premium, which measures the yield difference between a high-yield bond and a Treasury bond of comparable maturity, has dropped below 400 basis points (4.0 percentage points) to 397 basis points, according to the latest reading on a benchmark Bank of America Merrill Lynch high-yield index.

The junk bond risk premium also known as the spread basically tells you how much extra you’re getting paid to take on the credit risk of owning junk-rated debt. On average junk bonds now yield 5.59%, which means you’re paying less than 4 percentage points more than comparable Treasuries.

But as Michael points out, “this could still prove to be adequate compensation for credit risk for the time being, given that credit risk remains secondary to interest-rate risk in the eyes of many investors, and the default rate for junk-rated companies, currently 2.4%, is expected to hold steady through 2014.”

“If average yields start marching lower again in 2014, it’s more likely going to be based on falling spreads alone. If junk bonds remain in favor, investors will need to be diligent about making sure they’re getting paid for credit risk, since it might look tame now but it always rears its head eventually.”

You can check out the full article here.

 

Todays Other Top Stories

 

Municipal Bonds

Bloomberg: – Tax break’s escape might lessen pressure to sell. – For the $3.7 trillion municipal bond market, Washington’s political divide may be a good thing.

Bouchey Financial: – Expectation for muni bonds in 2014. – This past year was a tough one for municipal bond investors with the Barclay’s Muni Bond Index posting its worst performance in the past 20 years.  This negative performance was driven in part by the high profile bankruptcy of Detroit and the issues related to cash strapped Puerto Rico.  Municipal bonds were also negatively impacted by rising interest rates driven by the Fed’s announcement in May that they would start tapering their monthly bond purchases.

Bloomberg: – Tax-free bonds go first-to-worst after risk adjustment. – U.S. municipal debt is set to trail stocks, commodities, Treasuries and corporate bonds in 2013 when adjusted for volatility, halting a two-year streak of outperforming those assets.

SF Weekly: – Bonds for johns: Muni proposes debt-financed restrooms. – For the past six years, the Municipal Transportation Agency has had the authority to issue bonds. In essence, it can print money (well, your money). The department has rarely opted to do so, but in 2013 the MTA issued a $75 million bond. Yet the smorgasbord of projects it covers are decidedly pedestrian ­— in multiple applications of the word.

ETF Trends: – Tax-exempt muni ETFs dodge changes in election year. – Political stalemate on Capitol Hill has frustrated the markets, but for municipal bond exchange traded funds, the bickering weakens any chance of a tax-code overhaul in tax-exempt munis.

 

Treasury Bonds

WSJ: – U.S. Treasury prices fall, closing out a losing year. – Prices of U.S. Treasury bonds fell in the last trading session of 2013 as the latest housing and consumer reports brightened the economic outlook, and were poised for the biggest annual loss in five years. The world’s largest sovereign-debt market has handed investors a loss of 2.6% this year through Monday in total return, the biggest since 2009, according to Barclays.

 

Corporate Bonds

WSJ: – Companies sell record $1.111 trillion of bonds in 2013. – Highly rated companies sold a record $1.111 trillion of bonds in the U.S. in 2013, even as the debt offered the worst returns in five years.

 

High Yield

Courier Journal: – Louisville mayor says arena lease OK despite junk bond rating. – Mayor Greg Fischer said Monday he will not push to change the lease agreement for the KFC Yum! Center despite two major credit rating firms downgrading the downtown arena’s bonds to “junk” status.

 

Emerging Markets

InvestorPlace: – The best emerging market bond ETF you’ve never heard of. – Even with Fed beginning its much ballyhooed taper, interest rates are still in the basement. And they’re likely to stay relatively low for quite some time. That news has sent investors into all-sorts of different types of bonds and asset classes looking for yield. Emerging market bonds and debt have become one of the most popular stopping points as investors look to expand their options. That is, unless you’re the Market Vectors Latin American Aggregate Bond ETF (BONO).

Reuters: – Funds shrug off default risk in dash for emerging company bonds. – When Brazilian oil firm OGX tried to tap bond markets for $2 billion in 2011, investors were ready to hand it $5.5 billion. Two years on, OGX is in default and the debt trades at less than 10 cents of its original face value.

 

Bond Funds

Reuters: – Mortgage bonds reward yield-sensitive investors. –  Investors searching for higher yields from rock-solid investments were put on hold again last week by the Federal Reserve, which pledged to keep interest rates low even as it scales back its extraordinary monetary easing.

USA Today: – Bond funds give investors a lump of coal in 2013. – Most bond investors got a lump of coal this year, and that may be just a taste of what’s to come in 2014.

New York Times: – Reading between the lines of 2013’s big stories. – When we see a story in the news repeatedly, we have a tendency to think it must be important. Thinking something is important often means we feel we should do something about it. This year, there were a lot of catchy headlines in the financial news, and most of them represented little more than noise. There were, however, a few important themes in 2013 that may affect your financial plan as we head into 2014.

WSJ: – How to overhaul your portfolio for 2014. – This was one of the best years ever for U.S. stocks, but the 2013 stock market was powered far more by rising price-earnings multiples than by growing earnings. Nobody can foretell what the market will do in 2014. Sometime in the future, however, it likely will have a sharp correction. Yet selling all your stocks does not make sense.

Betalyst: – Crank up your portfolio’s yield with this rock star fund. – The purpose of this article is to highlight an income closed end fund offering an investor’s portfolio solid monthly income, diversification, security, consistency and most importantly, a high yield.

Fibonacci Sequence: – 3 values in fixed-income closed-end funds. – Here are three FI CEFs that may offer value (in terms of a sustainable current yield), without excessive exposure to the risk of rising rates, and a margin of safety if events do not pan out as we forecast.

NASDAQ: – 2014 ETF income investing ideas: Part 1 – Bonds. – Income investors face a brave new world in 2014 that is punctuated by real interest rates trending higher and the Federal Reserve slowly reducing the pace of their quantitative easing measures. This has led to fears of a massive shift in asset allocation from traditional fixed-income to equities and alternative investments. In fact, many have abandoned bonds altogether and have sworn off owning them for the foreseeable future. On the flip side, stalwart income seekers have shifted a tremendous amount of their holdings to short duration or credit sensitive holdings which have thrived in 2013.

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