The risk in the high yield bond market is off the charts. Yields are near record lows, bonds that shouldn’t be getting funding are and at terms unfriendly to investors. A default cycle is in sight and unfortunately the nature of liquidity has changed. This one is shaping up to provide an even greater investment opportunity than the last.
Dodd-Frank has pushed the dealer out of “broker-dealers” meaning that there is much less inventory the dealers are willing to hold. As GMO’s Ben Inker points out in one of this week’s posts, “the likelihood of a nasty shock occurring from even a temporary imbalance between the number of buyers and sellers has surely gone up from pre-crisis days”. The result is that there will be little floor beneath the high yield market when the selling wave hits. I can just see the number of distressed debt funds beginning to chomp at their bits.
Further, covenant-lite loans now represent half of all corporate bonds outstanding, according to Barclays. In the chase to find yield, investors are forgetting about the underlying credit risk. Complacency reins – a default crisis of mass proportion lies ahead.
Further, covenant-lite loans now represent half of all corporate bonds outstanding, according to Barclays. In the chase to find yield, investors are forgetting about the underlying credit risk. Complacency reins – a default crisis of mass proportion lies ahead.
Seen through my lens, another “once in a generation” buying opportunity is fast approaching. I remember saying the same thing in 1999 and 2007. The lines between generations must be shrinking as such opportunities seem to appear about once every seven years or so.
Steve Blumenthal
Founder & CEO CMG
Stephen Blumenthal founded CMG in 1992. He is CEO, Chief Investment Officer and portfolio manager at Capital Management Group, Inc. where he manages equity and tactical investment portfolios. He is a frequent speaker and writer on investment strategies and has been featured in various media sources including the Wall Street Journal, Barron’s, Investor’s Business Daily, Pensions & Investments Magazine, Investment News, RIA Biz and Smart Money. He has been a guest on CNBC, Wall Street Journal Live, and Bloomberg. Mr. Blumenthal is a frequent speaker at industry conferences (NAPFA, IMCA, Index Universe, Opal Financial Group Indexing & ETF Summit and NAAIM) and is author of CMG’s popular investment research commentary. With 30 years of investment management and industry experience, prior to founding CMG, Mr. Blumenthal worked for Merrill Lynch Institutional, Merrill Lynch Retail and Prudential Securities.
Mr. Blumenthal graduated with a Bachelor of Science degree in Accounting from Pennsylvania State University. He is married, has three children and is active in his community coaching youth soccer.
