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Tuesday, August 19, 2014

WSJ on High Yield Bond Market

No sooner did I post my analysis of the high yield market than this article came up in the WSJ. I worked on and off for a week on my piece..time to get things done and posted more promptly

Institutions Take Advantage of a Recent Slide in High-Yield Bonds' Price Triggered by Small Investors' Selling

Large institutions are snapping up U.S. junk bonds, taking advantage of a price slide triggered by an exodus of individual investors.
Many big money managers say they remain bullish on these risky corporate bonds despite concerns that the market is overheated and worries that geopolitical unrest could fuel a rush to safer assets.
Their interest stands in contrast to a wave of selling by retail investors, who sucked almost $13 billion out of junk-bond mutual funds and exchange-traded funds in the four weeks ended Aug. 6.
Analysts said upheaval in Ukraine, Iraq and Israel unsettled some investors, and concerns that prices were already too high drove some smaller investors to sell. They worried that the multiyear record-breaking run of junk bonds might be near an end.
That presented a buying opportunity for larger investors, who say the $1.6 trillion U.S. junk-bond market remains healthy and note that many bonds are now cheaper than before.
Gershon Distenfeld, who oversees $35 billion in junk bonds as director of high yield forAllianceBernstein ...
"Investors who panic in these selloffs—it's the wrong thing to do," Mr. Distenfeld said.
While there are no hard data to show hedge funds and large asset managers moving into junk bonds, a rise in prices last week suggested some big firms were buying, analysts said. U.S. high-yield bonds returned 1.02% this month through Friday, according to Barclays PLC, pushing year-to-date returns to 5.112% as of Friday from 3.498% as of Aug. 1

"There really is no good reason why high yield sold off in the first place" this summer, said David Mazza, head of research in the ETF unit at State Street Global Advisors, which oversees $413 billion in assets. "Nothing changed in the outlook for defaults."...
Standard & Poor's predicts the U.S. corporate high-yield default rate will rise to 2.7% by June 2015 from 1.5% this past June. Those rates are well below the average of 4.4% over three decades...

There were signs last week that some small investors were rethinking their retreat. U.S. junk-bond mutual and exchange-traded funds took in $680 million in the week ended Aug. 13, ending four weeks of outflows. The streak included a $7.1 billion weekly decline that was the biggest ever, fund tracker Lipper said.

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