Friday, August 8, 2014

OH WAIT JUNK BONDS ARE FINE: here's what you need to know


ETF Trends - corporate finances support junk bonds, you know. Quote:
“What we’ve seen in high yield has really been a retail-driven story,” Contopoulos said on CNBC. “There’s been a confluence of events, between geopolitical, Fed and media coming out and talking about a leverage finance bubble, and the easing of lending standards, that have instituted some fear in the retail crowd. You couple that with valuations that were very, very rich at the end of the second quarter—I think that’s really led to a little bit of retail panic, if you will, although that has subsided over the last few days.”

Since the August 1 low, JNK is up 1.1% and HYG is up 1.5%.

Contopoulos believes the high-yield bond market will continue to “rebound pretty well,” citing strong fundamentals that support the asset class. Specifically, the credit risk is very low and Bank of America Merrill Lynch does not anticipate defaults over the next couple of years.

If you look at interest coverage, which is probably the single most important metric in the high-yield market—so the ability of a firm to ultimately make the interest payment on its debt through earnings—it’s at all-time-high levels,” Contopoulos said. “And this is why companies default, because they can’t pay interest expense.”
Bu-bu-bu-bu- wait though! Isn't junk debt about to collapse because people are selling it? Don't things collapse when people sell them? What about the lack of liquidity in the junk market?

People bid-smashing something into an illiquid market drives prices down. But if there is a fundamental underpinning to the security's pricing, all that does is give buyers a bargain price.


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