By Paul Katseff, Investor’s Business Daily
Consumers have been pocketing big savings from low energy prices. Light sweet crude oil is trading around $42 per barrel. That’s huge savings in comparison to the $107 price it fetched in late June 2014.
But there are no smiles in the Oil Patch or among investors in energy stocks.
And that pain is likely to spread to bond investors, including many who invest in high-yield bonds for retirement income.
Due in part to relentless stock market news about oil’s bottom-of-the-barrel price, IBD’s Oil & Gas-Drilling industry group is ranked 188 out of 197. It occupied the same lowly spot eight weeks ago.
Group rank is based on six-month price performance.
And the pain will worsen for investors in energy bonds, warns a money manager with lots of high-yield exposure. Since many are high-yield bonds, anything that chills their prices and drives up yields is likely to infect other high-yield bonds, says Paul Schatz, president of investment management firm Heritage Capital and treasurer of the National Association of Active Investment Managers.
The low cost of energy will take a toll on bonds issued by small shale and fracking-exploration companies, which are an essential source of their financing, Schatz adds. Still, it may take a year or more for the full impact to play out.
Higher interest rates will make it harder for many small energy producers to pay their debts. They will continue to lay off workers. And they will cut back on their purchases from suppliers, who will share that pain.
Defaults will boost yields and knock down prices.
“I’m a huge high-yield investor and love the space,” Schatz said. “This cycle will create unbelievable buying opportunities in high yield, but not any time soon.”
He is focusing on short-term trades in that space for the foreseeable future.
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