Robert Powell of MarketWatch today says you should buy junk bonds, while Zero Hedge says he’s turned bearish on the sector.
I’m going to go with Zero Hedge because he makes a more compelling case, and in fact, if you didn’t see the headline on the Marketwatch story, you might think it was telling you to sell as well. In fact, the Marketwatch story’s big bull, Steve Huber, manager of the T.Rowe Price Strategic Income fund says, “To be sure, there is a scenario when investing in junk bonds might not so wise. If the U.S. growth slowdown proves not to be temporary and European periphery issues deteriorate further, the general selloff in risk assets could accelerate.”
It sure looks like that’s happening. And investors aren’t waiting around to see what happens. Powell says junk bond mutual funds saw $1.6 billion in outflows in just one week this month.
Meanwhile, ZeroHedge is down on the entire high-yield market, especially Greek, Irish and Portuguese bonds. However, he is particularly bearish on the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK).
He says if the junk bonds continue to see heavy outflows “it will be hard for high yield to maintain current prices, particularly given how illiquid it currently is.” He says you can tell how illiquid they market has become by the haircuts both funds took last Thursday, when HYG fell 2%. As trading volumes in junk bonds fell and bid/ask spreads widened, institutional investors sold the ETFs rather than the actual bonds. With the liquidity at an extreme low, he says cut your high-yield risk, and is on the verge of shorting the ETFs.
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