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Brewer et al. ?Index for Junk Yields?
Old 08-31-2005, 01:51 PM   #1
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Brewer et al. ?Index for Junk Yields?

Hi Brewer/ bond people. I need an index or benchmark of junk yields to compare to Treasuries. I want to make a spreadsheet and look carefully at the history of spreads. Of the top of my head, spreads look unrealistically low at present, but I would like to have an historical look-see.

Could you suggest a source? Ideally something where I can download some historical data.

Thanks, Ha
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Re: Brewer et al. ?Index for Junk Yields?
Old 08-31-2005, 01:59 PM   #2
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Re: Brewer et al. ?Index for Junk Yields?

Ha, just about all of the big banks have junk bond indices. I am not aware of a readily accessible public source, though.

There are some big problems with any junk bond inex. Unlike treasuries, equities, and even investment grade corporates, the junk bond market is fundamentally illiquid. With the advent of TRACE, things are a little more transparent, but it is still a lot tougher than you would expect to even value a particular junk bond. You might see it quoted at X, but if you are an institution looking to trade $1MM or more in a particular name, the actual price you might be able to trade at may be pretty far from X.

As this is my stock in trade, let me save you a large amount of effort: junk bond spreads are at historically low levels. If there is even a modest amount of defaults, valuations are unsupportable. The same goes to IG corporates, although not to quite the same degree.
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Re: Brewer et al. ?Index for Junk Yields?
Old 08-31-2005, 03:50 PM   #3
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Re: Brewer et al. ?Index for Junk Yields?

Thanks Brewer.

Ha
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Re: Brewer et al. ?Index for Junk Yields?
Old 08-31-2005, 05:35 PM   #4
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Re: Brewer et al. ?Index for Junk Yields?

Lehman Bros. has this high yield index: http://www.lehman.com/LL_S/public/pu...bondindex.html
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Re: Brewer et al. ?Index for Junk Yields?
Old 08-31-2005, 07:55 PM   #5
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Re: Brewer et al. ?Index for Junk Yields?

Thanks Ronin. I have my spreadsheet set-up. I may be able to get historical data. If not I will gradually have a lot of data anyway.

Just a cursory look says that, as Brewer said, the current spread of around 3% is low by historical standards. I donít know what the largest historical spread was, but I think it was at least 10%.

Say things get unbelievably wonderful, and that spread narrows to 1%, with govít rates basically unchanged. As I see it, I would be out roughly Duration * 2, or no more than 10%. If govt yields decline, I guess it is possible but very unlikely that High yields could decline along with them.

I say unlikely, because I canít see government yields declining without a very weak economy, which should directly and adversely affect junk.

On the upside (yields up) there is a lot more room, IMO. Also, the likelihood of upside moves seems greater, to interact with larger potential payoffs.

I am considering an investment in "Access Flex Bear High Yield Fund", a fund which attempts to move inversely to the high yield markets by buying a selection of credit default swaps. It has costs of 1.55%, high, but IMO not bad for a relatively short term commitment.

I have to check, but I think this should give me the chance to get long term capital gains, as opposed to the short term gain of a short sale of a high yield ETF. Also, I can buy it in my tax deferred accounts too.

Critiques welcome.

ha

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Re: Brewer et al. ?Index for Junk Yields?
Old 08-31-2005, 08:07 PM   #6
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Re: Brewer et al. ?Index for Junk Yields?

Ha, I have a couple of thoughts:

- Junk spreads have been a LOT higher. In 2002, junk spreads on the indexes blew out to over 10% and liquidity dried up. That means that if you actually wanted to trade something, you would have to navigate huge bid-ask spreads. Not fun. Junk bond investors tell me that they could buy CHTR bonds in the 20s (that is, 20 something cents on the dollar). And that was a more liquid name. In 2003, I was told by one of my clients, a large institutional fixed income investor, that their records indicated that 2002 default experience in their portfolio was worse than what they experienced in the Depression.

- CDS is not the same thing as shorting a high yield index. The nasty thing about CDS is that there are so many hedge funds piling into that sector of the market that when an issuer actually does default, the bonds often rally. This happened with Collins & Aikman earlier this year when the bonds went from the mid 20s shortly before they blew up to about 40 when they actually filed. CDS is also a wasting asset, similar to a put option. If the named issuer doesn't blow up immediately, the value of the option drains away.

I've no idea if it makes sense to buy this fund right now or not. If you have significant junk exposure already, it may indeed make sense. Personally, I would prefer to stay in either equities (high dividend, low risk, or rock bottom stuff) or in cash/CDs. When the blood is running in the streets, I'll buy some junk bonds. May was a good time to do so. August was not.
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Re: Brewer et al. ?Index for Junk Yields?
Old 08-31-2005, 08:50 PM   #7
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Re: Brewer et al. ?Index for Junk Yields?

Bill Bernstein wrote an article involving the J-T spread:

Credit Risk: How Much? When?

including this graph of the J-T spread 1988-2000:



I think I've got the yearly returns for Vanguard's HY fund + Lehman High Yield Index back to 1984 somewhere. Here are the returns back to 1990.

- Alec
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Re: Brewer et al. ?Index for Junk Yields?
Old 08-31-2005, 11:24 PM   #8
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Re: Brewer et al. ?Index for Junk Yields?

Damn, bad eyes, getting old, maybe need new reading glasses. I thought the title of this thread was junk YARDS. I jumped right on it, after what could be more RE/LBYM than junk yards. But, naw, its more fancy financial stuff.

Anyone got an index of junk yards?
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