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Monday, July 22nd, 2013
a fork in the road

13 0722 zHTG zJNK zSPX

In April, I said of the junk bond market:

“Today we have a situation where investors have flocked in, even as the valuation picture has worsened as the yield cushion against inevitable problems has been depleted.  Nothing will necessarily happen tomorrow or the next day, but there’s no margin for error if something untoward does occur.”

That posting featured a look at the amazing changes in the attributes of high yield bonds by quality level.  The chart above looks at it in broad terms, as measured by the CS High Yield Index II.

The top panel compares the performance of that index with the S&P 500.  You can see that they tend to move together.  The middle panel shows that a little more clearly, displaying the relative performance between the two, which shows a persistent underperformance of junk since the beginning of the year.  (As the line moves up, junk is outperforming, and as it moves down stocks are outperforming.)

The chart starts at the end of 2008, when the high yield market was in tatters.  At bottom you can see that the nominal yield and spread have fallen dramatically over that time, with a noticeable move up in yield during May and June and a subsequent fall over the last few weeks.  As you might have expected, investors pulled money from the sector, but the fund flows have rebounded.

There seem to be interesting things going on in every corner of the fixed income market, but this near-equity group continues to diverge from stocks.  Will they get back together?  If so, in what way?  (Chart:  Bloomberg terminal.)

donning the goggles

There are developments going on that will change how we interact with technology — and how we interact with the markets.  A piece from Inferential Focus triggered some musing about how we will see the markets of the future after donning the goggles.

The “investing versus speculating” discussion hosted by the CFA Institute is now complete.  You may find perspectives on it and a link to it in the previous posting.