...as the article on page C7 of the WSJ indicates, the level of the average “junk” bond yield, at 6.84%, is at a new all-time low (in March 2009, the yield was 20%). This is what the demographically-induced demand for income has accomplished. Now there may well be another 25 basis points of spread compression left, perhaps even 50bps, vis-à-vis Treasuries, but the prospect of achieving alpha through price appreciation at this point is becoming much more limited. It’s hard to imagine that it was just two years ago that the group was trading at 55 cents par value (now at a four cent premium).
While we still like the group, the key is to put capital to work opportunistically, especially after the run the high-yield sector has enjoyed. As the Ahead of the Tape column in the WSJ points out, the $6.7 billion that have flowed into high- yield bond funds so far this year — six weeks! — is half of the entire inflow in 2010. That is a sign of perhaps just a tad too much exuberance and augurs for patience and resolve in looking for better re-entry price points.
---Rosenberg today
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