"It's the only place I can find any yield whatsoever with a reasonable risk," said Lee Hevner, an individual investor who said he started buying junk bonds this year for the first time.Those will be famous last words. That poor sot allowed his ignorant, greedy investment advisor talk him into putting 15% of $500k stash in junk bonds. Hope he can afford to lose most of it.
Once again, courtesy of the Fed's zero interest rate policy (ZIRP) and the Government's catastrophic fiscal policies, the yield-starved individual investor has been flooding the high yield market with money in a desperate search for investment yields that have any shot at keeping up with the true cost of living.
Investors of all stripes have been diving into junk. Many of them are searching for investments that yield more than the meager rates offered by Treasuries and investment-grade corporate bonds. They are flooding into high-yield mutual funds and exchange-traded funds, market data show.That quote is from this article from today's Wall St. Journal titled, "Junk Bonds Feed A Hungry Market." Here's the LINK. This desperate quest for more investment income has triggered a big wave of money flows in high yield bond funds and ETF's, which in turn has led to a huge issuance of new high yield bond deals.
Take it from a 9-year sell-side institutional junk bond market trader, the 7% average yield paid on junk bonds is not even close to being enough compensation for the enormous amount of credit risk embedded in the typical junk bond-issuing company. Moreover, a lot of these deals are done in order to "dividend" money out of the company and into the pocket of the "sponsoring" private equity/leverage buyout firm which owns the company. It's a way for the sponsor fund (like KKR or Bain Capital) to cash out on a big portion of the up-front equity capital used to engineer the buyout. Trust me, it's not a good deal for junk bond investors.
In addition, the big Wall Street firms who underwrite and sell these deals take out enormous fees. And the junk bond mutual fund money managers and pension fund managers get paid a lot money of "manage" this money. On a risk/return basis, high yield bonds are a terrible risk for the individual investor, even to the extent that the individual's money is being put in a "diversified" fund of junk bonds.
And think about this: for how much longer does anyone really believe that the Fed can engineer historically record low interest rates? We know the economy is falling off of a cliff again. So even if the recent default history in the high yield market has decreased, as the economy tanks many of these companies will run into a brick wall. A spiking default rate combined with rapidly rising interest rates -this will happen as more money flees the dollar and a much higher yield is required to induce investors to buy the ever-increasing rate of U.S. Treasury debt issuance - will cause high yield bond prices to plummet. If you have a 20% decline in the value of your high yield mutual fund, this will annihilate the 7% yield it currently throws off.
In other words, the individual investor - forced into blindly grasping for current investment income - is being set up once again by the financial elitists and corrupt bankers to get slaughtered. It's really just another mechanism for those on Wall Street to confiscate middle class wealth.
It brings to mind the famous Will Rogers quote about being more concerned with the return OF his money than the return ON his money. Those who understand the necessity of moving fiat currency based investments into physical gold and silver do not have to be concerned about either.
Have a great weekend! Hope springs eternal as baseball season starts next week and every fan out there - including me - has renewed hope that their team will reach the World Series....