Bad idea to try to short junk IMHO.
personally, i think it's a great idea. imo junk is probably the most overpriced asset class at present, other than the tech Ponzi schemes which are fundamentally overpriced at any level above zero.
the average junk bond trades at 106, which is ridiculous since they pay off at par, and with a mortality rate of 15% or so, a significant percentage are going to zero or well below par.
Plus you will be responsible for those interest payments.
you mean the "whopping" average junk yield of 6.3% or so? which is only around 200 bp higher than T-notes? a spread trade would have a carrying cost of ca 200 bp. so 200 bp carry to sell at 106 that which can only pay off at 100, and probably far less on average? tell me this isn't a great opportunity. the question, in my mind, is what would be a good way to implement such a trade. maybe shorting a closed-end junk fund, if there is sufficient liquidity for such a trade? or are there any short-junk funds?
When junk takes a hit, stocks will go down a lot more.
i think a distinction needs to be made between stretching for yield and asset class risk. the tremendous overpricing of junk reflects a huge stretch for yield, just as can be seen in anything that pays above Treasurys--look at the Canroys, e.g., which trade at huge premia to the E&Ps.
risk is another factor, but is distinct from the yield stretch. increased risk premia will affect all asset classes. however, you need to keep in mind that a lot of the junk being issued now very much lives up to its name, and can't be compared to higher-quality equities. |
