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Why High Yield Bonds Could Surge Again

Published Wed, 23 Aug 2017 13:18:53 -0400 on Seeking Alpha

The conventional wisdom about junk bonds' steep decline in 2014 and 2015 is that it is the result of the crash in oil. Indeed, lower oil prices caused a spike in oil-related defaults throughout 2015 and 2016, and both (HYG) and (JNK) seem to have anticipated this with their steep price declines that made the "taper tantrum" of 2013 look quaint:
However, this narrative only tells part of the story. A lesser known dynamic was actually a major contributor to the sell-off, and this history is important to remember because the opposite may soon happen, which could boost high yield bonds significantly.
In July 2015, the Volcker rule went into effect, which limited non-market-making holding of corporate bonds by banks. That, in turn, limited demand for junk bonds.
As simple economics tell us, when demand declines and supply remains constant, prices must decline. Zooming into mid-2015, when the oil slide had already reached its apex, we see an acceleration in high yield price declines.

This was happening even at a time when high yield defaults were taking a breather:

Again, conventional wisdom tells us that a rising Federal funds rate target caused that price slide-but we're now seeing a much more aggressive increase in the Federal funds rate without a decline in high yield prices; in fact, the spread between Treasuries and high yield has tightened significantly.

Note also that the spread between the two began rising sharply in... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
NICHOLAS-APP CONV & INCOME 5.68   0.0 0.00 0.00 10.90
NICHOLAS-APP CONV & INCOME II 5.09   0.0 0.00 0.00 10.57
DREYFUS HIGH YIELD STRATEGIES 3.07   0.0 0.00 0.27 9.63
PIMCO INCOME STRATEGY FUND 11.46   0.0 0.00 0.00 9.38
PIMCO HIGH INCOME FUND 7.80   0.0 0.00 0.00 9.34
PIMCO INCOME STRATEGY FUND II 10.42   0.0 0.00 0.00 9.17
MFS INTERMEDIATE HIGH INCOME FUND 2.68   0.0 0.00 0.00 9.08
CS HIGH YIELD BOND FUND 2.58   0.0 0.00 0.00 8.87
FIRST TRUST HIGHOME LONG/SHORT FUND 14.97   0.0 0.00 0.00 8.82
EATON VANCE TAX-MAN GLOBAL DIVERSIFIED 8.36   0.0 0.00 0.00 8.75
PIONEER HIGH INCOME TRUST 9.29   0.0 0.00 0.00 8.72
WELLS FARGO ADV INCOME OPP FUND 8.20   0.0 0.00 0.00 8.61
PIMCO CORPORATE OPPORTUNITY FUND 18.05   0.0 0.00 1.69 8.59
CREDIT SUISSE ASSET MANAGEMENT INCOME FUND 3.16   0.0 0.00 0.27 8.52
WA HIGH INCOME FUND II 6.76   0.0 0.00 0.00 8.27
BLACKROCK CORPORATE HIGH YIELD FUND VI 10.76   0.0 0.00 0.00 8.01
WESTERN ASSET GLOBAL HIGH INCOME FUND 9.95   0.0 0.00 0.00 7.59
NEUBERGER BERMAN HIGH YIELD STRATEGIES FUND 12.01   0.0 0.00 0.98 7.45
MASSMUTUAL CORP INV 16.54   0.0 0.00 1.20 7.27
EATON VANCE TAX-ADV DIVIDEND INCOME FUND 24.50   0.0 0.00 0.00 7.11
WESTERN ASSET HIGH INCOME OPPORTUNITY FUND 5.07   0.0 0.00 0.00 6.98
EATON VANCE LIMITED DURATION INCOME FUND 12.51   0.0 0.00 0.00 6.69
SPDR BARCLAYS CAPITAL HIGH YIELD BOND ETF 108.94   0.0 0.00 6.07 5.58
ISHARES IBOXX $ HIGH YIELD CORPORATE BOND FUND 87.32   0.0 0.00 4.60 5.27
INVESCO VAN KAMPEN ADV MUNICIPAL INC TRUST II 11.18   0.0 0.00 0.00 4.77
BLACKROCK MUNICIPAL INCOME TRUST II 14.78   0.0 0.00 0.00 4.63
PIONEER MUNICIPAL HIGH INCOME TRUST 12.28   0.0 0.00 0.00 4.59
NUVEEN DIVIDEND ADVANTAGE MUNICIPAL FUND 14.24   0.0 0.00 0.00 4.44
EATON VANCE MUNICIPAL INCOME TRUST 12.72   0.0 0.00 0.00 4.42
BLACKROCK STRATEGIC MUNICIPAL TRUST 14.85   0.0 0.00 0.00 4.41
BLACKROCK INVESTMENT QUALITY MUNICIPAL TRUST 15.60   0.0 0.00 0.00 4.33
BLACKROCK MUNIYIELD CALIFORNIA INSURED FUND 14.23   0.0 0.00 0.61 4.23
BLACKROCK MUNIENHANCED FUND 11.30   0.0 0.00 0.00 4.11
WESTERN ASSET MUNICIPAL HIGH INCOME FUND 7.65   0.0 0.00 0.00 3.99
BLACKROCK MUNIHOLDINGS NY INSURED FUND 13.55   0.0 0.00 0.00 3.91
NATIONAL FUEL GAS 48.74   14.4 3.39 1.74 3.53
BLACKROCK NY INSURED MUNICIPAL INCOME TRUST 13.84   5.5 2.50 0.00 3.48
NACCO INDUSTRIES 52.27   8.4 6.19 0.76 1.49

NICHOLAS-APP CONV & INCOME - NCV
NICHOLAS-APP CONV & INCOME - NCV  


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