Junk

  • I was early and wrong about junk bonds last fall.  I got caught-up in the November rally.  Since the March 9th lows junk bonds have done well and I have missed that market.  Tired of being 0 for 2, I am looking at it again.  I was inspired by Kevin Ferry who regularly appears on CNBC from Chicago and by Lisa Hess, a Forbes columnist.

Bernanke is receiving good, almost great, reviews for the Fed’s bond repurchase program.  They bought 2-3 year paper yesterday and are buying 4-7 year today.  Last week the Fed released a paper which, in effect, said that it is bond spreads (notes and bills on the low end, junk bonds on the high end) that dictate the economy.  The Fed seems to be applying pressure to these spreads where they can make a difference.  Spreads between notes and junk are high now as corporate defaults are now expected to be numerous.

  • The trick, of course, is to manipulate rates to provide maximum incentives to lend without pricing out borrowers.  And, importantly, to further manipulate rates so as to not choke off the recovery without increasing inflation. Tricky, tricky stuff.  The optimists will believe the Fed can succeed.

Should the economy be stimulated by these manipulations then junk bonds, currently with huge yields (because of the doubts about defaults), should go higher.  JNK is the SPDR Barclays High Yield bond ETF.  Trading at $31 it offers a 14% yield.  High was $46, low was $25.    HYG is iShares iBoxx junk bond ETF.  Trading at $72 if offers an 11% yield. High is $100, low $61.50.