David Gyung
Bonds have not been in my focus for some time now. They were yielding nothing or just next to it, and I didn’t think that they represented a decent investment opportunity. The Fed, in their meanderings, have changed all of this, and it is time, in my opinion, to consider them as a decent investment option.
Bonds, like equities, of course, had a miserable 2022, but they are beginning to get more interesting lately. I am especially focusing on high-yield bonds. In the last month, they were up 1.43 basis points, as compared with IG corporates, which were only up 0.19 basis points. This is a substantial increase for the last 30 days.
While “credit risk” is always part of the equation for all investments, including bonds, Bloomberg now shows that their U.S. High Yield Bond Index now yields 8.32%, which handily beats our 7.2% inflation number. High-yield bonds are now on the winning side of things, after years of being on the losing side of inflation.
What you want to look for here are bonds that do not need a serious amount of refinancing, as the Fed will surely be driving rates higher. Consequently, the debt-to-equity ratio is an important consideration. Bonds, as we all know, are higher than equities in the capital structure, and it is not if the Board of Directors can change the coupon as they can, at their whim, change the dividend in equities.
Consequently, a stock with the same dividend as a bond yield is worth significantly less, in my opinion. Also, bondholders, of course, have priority over equity holders in any kind of liquidation. This is something to remember as you consider your investment choices.
Further, there are several sectors that stand out, such as energy and commercial real estate, where the risks have offsetting possibilities as the Fed continues their battle with inflation. Assessments should be made on both yield and safety when considering the attractiveness of high yield bonds. I have dealt with them and supervised both traders and salespeople in this area, and while there are risks, there can also be very nice returns. My other comment here is to concentrate on duration, as time can change many things as it ticks along.
For now, with our flummoxed yield curve, I would stick with shorter maturities, as not only is the risk factor lessened, but the Treasury yields and spreads to Treasuries are quite attractive in the short end. Virtually no one is talking about this opportunity in the press, so if you give this some thought and pursue the idea, I believe you have a head start before the crowd swarming in.
Opportunity is knocking.
Open the door!
Original Source: Author
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