Bob Brinker Junior says to buy junk bonds and short treasuries.
Low-risk way to capture junk’s yields
Commentary: Junk-Treasury spread remains wider than average
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — There may be a way for bond investors to have their cake and eat it too.
We’ve been tantalized for several years now by the yields on junk bonds, which even after coming down in recent months are still as much as 6% or higher. But many of us nevertheless have not dared to more than tiptoe into the junk-bond arena, wary of their high risk.
But, at least according to several of the top-performing bond market advisors I monitor, there may be a way to hedge that risk and still capture much of junk bonds’ mouth-watering yields. The key is to make a market-neutral bet that the spread will narrow between junk-bond yields and Treasury yields.
This spread — sometimes referred to as the Junk-Treasury spread — represents the premium that bond market investors demand for incurring the greater risk of default of the relatively weak companies issuing high-yield debt. That spread got ridiculously low during the 2002-2007 bull market, when bond market participants, in effect, almost completely forgot about risk.
The credit crunch of 2008 reacquainted everyone about such risk, of course. But, in classic fashion, the bond market overreacted to the other extreme, widening the Junk-Treasury spread to a ridiculous extent.
Though it’s been coming down ever since, it still remains higher than its long-term average.
Robert Brinker, editor of Brinker’s Fixed Income Advisor, therefore thinks the spread will narrow even more in coming months. Brinker’s service is in first place for risk-adjusted performance over the last five years among the nearly 200 advisers tracked by the Hulbert Financial Digest.
Brinker’s preferred vehicle for investing in junk bonds is Vanguard’s High-Yield Corporate Fund VWEHX +0.17% , which Morningstar reports to have a current yield of 6.83%. In fact, the fund is tied for most popular among all mutual funds in a ranking of the most recommended funds among advisers who’ve beaten the market over the last decade....
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