Saturday, January 15, 2011

State of the Junk

Happy New Year to all. Two-thousand ten was a very good for junk bond investors like myself. Not as fantastic as 2009, but we’ll take this kind of performance any day of the week and twice on Sunday.

The FINRA-Bloomberg High Yield total return index was up 12.2%, for the year, on the heels of a 46% gain in 2009. Not bad.
There are numerous indices out there and this one just happens to be available and free. HERE

The equivalent Investment Grade index did quite well also, yielding 6.5%, even if it did give up some gains towards the end of the year.

For 2011 there are some things to look forward to and some issues to worry about.

Positive for junk: improving economies lowering default rates . Positive for bonds in general: rock-bottom short-term interest rates which continue to force investors to move up in risk to lock in yield.

On the worry side: Big Ben at the FED. Ben’s latest folly, called QE2, as in quantitative easing two or too (take your pick) is a fresh round of dollar printing from your favorite bearded guy.

Jon Stewart analyzed this to perfection last month, but here it is for those who missed it.

The Daily Show With Jon StewartMon - Thurs 11p / 10c
The Big Bank Theory
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I know there is a lot of debate over QE2, but I come from the third world, where we have been lectured for decades by first-worlders ad-nauseum that we can’t do this crap and get away with it unscathed.

Now, el Central Banker Numero Uno del Mundo is telling us that he can. Color me skeptical. This is going to come back and bite us and bond investors need to be aware.

When? Not Yet. How? Now sure. Stay tuned.

For now, it looks like us junk collectors will be fine in 2011, although it will be hard to keep up with the equity markets (so don’t try!). After that, it could be plan B time.

As for the photo: a cute little squid of the genus Stoloteuthis from the Indian Ocean.

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