Posted on Friday, 15th January 2010 by admin
In my previous article about high yield spread, I was explaining that it is the right timing to trade high yield bonds when there is an abnormal spread between the corporate yields and the federal bond yield. Some of you may think you obviously missed a great trading opportunity in 2009.
In fact, the high yield spread is now similar to the one observed back in 2007. This means that the panic we went through in 2008-2009 is over and the investors are now giving more value to the corporations and fear less to see them default their loan (bonds).
The demand for corporate bonds in 2009 was higher than the offer. Since the economy and the credit facilities have greatly improve as well, the high yield spread started to shrink back to a normal level. In addition to that, default payments were drastically dropping (1 case only in December 2009).
Back in 2009, the high yield bonds was one of the best performing asset class according to Merrill Lynch.
While the spread is getting smaller, there is still a trading opportunity. The high yield spread should decrease during the next 2 years. Most economists expect to see it shrink by another 100 basis point in 2010.
If the unemployment rate starts decreasing and the economy is rolling back, the bond value will follow the same trend and the yield spread will diminish. This is why there is still a trading opportunity in 2010. However, don’t expect to make astronomic yield as it was the case in 2009 (more than 30% for the high yield bond asset class).
If interest rates start going up, the high yield bonds might be the only bond class to show a positive results as their price doesn’t only fluctuate according to the rates, it also follow the stock market (as they are related to public companies).
Then again, instead of trading high yield bonds, I suggest to use ETF’s.
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