ebook essays pieces of the puzzle
Friday, January 20th, 2012
considerable risk

I find ETF Database a helpful site, but I have to question its recent statement that “high yield corporate debt may be one of the few bright spots in 2012 for those looking to enhance their current return without taking on considerable risk.”  Not the first part, since junk bonds might do well, but the end of the sentence is questionable indeed.

Seared into my memory is a time more than twenty years ago when I watched as the manager of one of the biggest high yield funds in the country took phone call after phone call from people who had been trying to “enhance their current return without taking on considerable risk.”

Last spring I wrote about “junk for grandma.”  The bottom half of the chart above shows a part of the graph that I used then to demonstrate how the spread between yields on junk debt and that on CDs might just prove irresistible to some.

The top panel of this chart shows the largest junk bond ETF (HYG) since its inception, along with an intermediate Treasury one (IEF).  You don’t have to go back to the unwinding of Drexel Burnham to see that there’s always been plenty of price risk to be found in this area.  Ironically, the high yield ETFs themselves might increase volatility going forward.  (Chart:  Bloomberg terminal.)

point counterpoint

The latest essay on investment process is about the importance of considering an opposing view (much like I was trying to present above) before making decisions.  Ask yourself — whether you are a professional investor or a neophyte or something in between — do you hear a true “point counterpoint” when you consider an idea or do your filters of information block out too much?