Junk bond investors head for the exits

Prices have been falling for weeks, signaling an end to a record run for the sector.

By MSN Money Partner Jul 21, 2014 1:48PM
Image: Stock investor © CorbisBy Ben Eisen, MarketWatch

Weeks of falling junk bond prices have started to spook some bond investors, signaling that the record run for the riskiest part of corporate debt may be ending.


Bond investors have been piling into high-yield debt for years as they search for income in a low-rate environment, but yields had dropped so much that even the Federal Reserve, normally not one to comment on asset prices, has raised concerns.


"Those valuations are very, very lofty right now. We're talking to clients about taking everything they own and paring back credit risk from the weakest part of the credit universe," said Richard Sega, chief investment officer at investment manager Conning, which manages $92 billion in assets.


Investors may be taking all that advice to heart. In the week ended Wednesday, mutual funds and exchange-traded funds that invest in high yield bonds saw a total of $1.68 billion in redemptions, marking the largest outflow since August 2013, according to data from Lipper.


However, the selloff hasn't extended to other parts of the bond market. While investors have been pulling money out of junk bonds, they actually increased exposure to investment-grade corporate debt.


The outflow from the junk-bond part of the market comes amid a decline in price and corresponding rise in yields over the past month. The Barclays High Yield Bond index, which is tracked by the SPDR Barclays High Yield Bond ETF (JNK), has seen yields rise from a record low of 4.83 percent on June 20 to 5.17 percent on Wednesday. That's still low by historical standards, but a sign that valuations have softened.


The premium that junk bonds pay over comparable Treasury bonds rose to 3.52 percentage points from 3.24 percentage points during the same time period, according to Barclays.


One risk for junk-bond investors is that these bonds tend to be less liquid than high-grade corporate debt, particularly with dealers making fewer and fewer markets in those bonds. If investors try to flee the market at once, the price moves could be severe, traders warn.


Still, market participants stopped short of calling for recent weakness to spiral into a selloff in junk bonds. The credit quality of issuers remains relatively healthy, particularly as the economy rebounds, so default rates have stayed low. Plus, the Federal Reserve has committed to keeping interest rates near zero, soothing investors who are reaching for yield.


But caution is still warranted, according to Jon Sablowsky, head of trading at Brownstone.

"People are buying a lot of risk that they aren't that familiar with," he said. "I think we're setting up for some danger ahead."

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24Comments
Jul 22, 2014 11:00AM
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We are waiting to dump the inefficency in Washington DC and to throw the Trouble-Makers out; Then, start anew.
Jul 22, 2014 7:28AM
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Why are illegals flying WITHOUT IDENTIFICATION? 
Jul 21, 2014 8:43PM
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I would risk sticking it out in high Quality Stock Dividend plays as opposed to any Bond Fund. FACT, Aunt Yellen, Uncle Ben, and the Global FEDS have created a Massive Debt Bubble. There will be severe consequences. You can always stick it out all the way down to ZERO once the massive Global Defaults then bond fund Liquidations start occurring. Staying Long and Strong can many times be a Fool's Errand. Especially in light of the looming longer term issues we face. It has never been a CRIME to lock in profits. Buy and Hold to Infinity is DEAD, it died the moment the Global FEDS went insane.
Jul 22, 2014 11:32AM
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They are ALL grossly overvalued junk bonds!!!!
Jul 22, 2014 12:40PM
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Too bad investors aren't dumping junk food stock, they'd be smart to do so

Jul 22, 2014 9:18AM
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THE NATIONAL AQUARIUM IN WASHINGTON IS GOING TO CLOSE.

BUT DON'T WORRY, IF YOU'RE IN D.C. AND YOU STILL WANT TO SMELL SOMETHING FISHY, STOP BY THE WHITE

HOUSE, THEY'VE GONE FROM:

"CHANGE YOU CAN BELIEVE IN"

TO

"CHANGING THE STORY UNTIL YOU BELIEVE IT"


`JAY LENO`
Jul 22, 2014 12:56PM
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obamacare gutted today from obamacare ruling.  Democrats are no longer screaming how its "the law of the land"

 

instead democrats are of course going to appeal the court ruling because "the law of the land" had different intentions then to how it was written.

Jul 22, 2014 1:17PM
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And Junk bonds are connected to this...?? in what way...?
Jul 21, 2014 5:21PM
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The other phenomenon that persists through the financial news 'noise'....

Many years ago, I opined to a Vice Prez at Morgan Stanley about how
frightened I was  by what was occurring with my high grade
bond fund.   Many redemptions were happening, and I didnt want to
follow the wave to crash on the shore of severe capital losses. 

He advised, " Staying long ensures you ride out the highs and the lows".
In other words, one becomes immune from short term fears regarding
bond fund valuations.  Plus, if its income one was solely interested in
(which would have been the original reasoning behind entering bond
funds anyway) then it was wise ( in strange way) to disregard the NAV
situation and concentrate on the disbursements.

Remember, high yield funds correlate to equities more than to their
more conservative cousins, the high grade bonds.  However both
eventually find a balancing point and return to profitability by purchasing
more (and higher yielding) instruments in the wake of higher rates.

He was fair.  He told me if I wanted to, I could exit. I sold half. 
Nonetheless, if we begin to think like Lemmings, we die like them.



Jul 22, 2014 9:03AM
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What is a bond? It's a pledge for a return on investment in a project with an end-date. We have a fully stagnant economy, so what got completed? EVERY bond is junk, comprised mainly with fake money. Nobody ever reconciled derivatives to see if they are real or kited monies (likely developed from other derivative contracts and in theory not reality). THAT is what bonds are made of today. Oh, and YOUR real money. Guess who gets that in a failure?
Jul 22, 2014 9:38AM
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Or the Heime Center or is that a Museum of crybabies....?
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And we thought Yellow had told us there were no bubbles

Gee folks if the US T-bills are bankrupt and never going to be paid back what of lesser bonds???

bonds should be called worthless bonds instead of junk bonds

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