Is it a good time to buy more junk?

[nun]

I've had about 10% of my portfolio in Vanguard High-Yield Corporate Inv (VWEHX) for a few years.....and it's been a bumpy ride, but last year it came back strongly. However I'm also looking at Pimco PTY CEF which did even better. Income only dividend was 16%.....I believe this is so high because of leverage, but they don't seem to be pumping it up with return of capital. However, the fund is trading at a premium and that gives me pause.

Thoughts, opinions on PTY and VWEHX as a pick for this year

 

[brewer12345]

I would not buy any CEF at a premium, no matter what it holds. That goes double for one with leverage.

As for junk, the market has really appreciated a lot. Terms and conditions have normalized and I expect that we will see increasingly foolish underwriting in the next couple of years. Spreads have also normalized and are compressing. On the whole, the junk market makes me go a big 'ol limp one. I would not be eager to buy here.

 

[JPatrick]

As junk goes, the Vanguard High Yield is regarded as the premium pick for those who enjoy a less junkier grade of junk. For that reason I wouldn't stray too far away if you like high yield with low (er) risk.
If you believe interest rates will rise, you might want to consider a floating rate fund. The FIDO FFRHX is considered one of the better ones. I recently took a chunk of SPHIX and put it into FFRHX. I'm not tampering with my VWEHX however.

 

[nun]

I guess Ill simply rebalance back into Total Bond Market and stop chasing return. When I see PTY's 16% yield and a 28% NAV increase I think my first thought that it comes with loads of risk is correct and I have enough of that with my equity indexes and VWEHX

 

[brewer12345]

And my last true junk individual bond is now the subject of a tender offer because the issuer is refinancing and wants to both push out maturity and (I assume) lower the coupon. I will happily tender for 105 and change. My only other individual bond is a crossover name (rated BBB/investment grade by one agency, BB/junk by another), which I will hang onto until either a strong bid shows up or maturity in 2015.

 

[FIRE'd@51]

I am concerned about rising interest rates. Hence, I don't think this is a good time to be buying bonds. Having said that, if I were to buy bonds, I would lean toward "junk" for two reasons. First, the higher interest rate on junk means a lower duration, and therefore, less interest-rate sensitivity than higher-grade bonds of the same maturity. Second, junk bonds are more highly correlated with equities than higher-grade bonds, and IMO equities are likely to outperform bonds going forward should the economy recover.

Currently, I also have about 10% of my portfolio in VWEAX and our old friends, ISM and OSM (which are inflation-indexed).

 

[veremchuka]

10% is a large allocation to junk imo but if you use it as an equity allocation then maybe not. junk bonds typically do well when the equity markets do well and this year "looks" to be a good year, we'll see. however, the time to buy the vanguard fund was dec 2008 when the nav was down in the low to mid $3 range! i bought some in the mid $4 range, it is just 5% of my total holdings. if it looked like the equity markets were about to crash then getting out may be wise. however, as that nav drops the yield goes up, in 12/08 it was around mid 13% or 14%!

 

[DeborahB]

I have bought bonds on the secondary market for several years and only slightly got burned (CIT, and they are making good on it). I never buy bonds at a premium - I find ones that are in some financial distress and are maturing in 1 - 4 years.

I don't trust that I can predict what interest rates are going to do, but I'm willing to tie up some of my money for a few years at 6% or (usually) more. Especially if it's in my roth ira so never taxed. (Yeah, I know, they might change the rules etc.)

The main thing is not to put too much money in any one place - sector, type of company, etc.

I have some money in bond mutual funds too, because I inherited them and so far they are yielding around 6% or a little more. I keep an eye on them.

Diversify, diversify... my mantra...

 

[BigNick]

If your financial adviser attempts to reduce your exposure to high-yield bonds, should you shout "Hey man, don't touch my junk" ?

 

[oldtrig]

I put $450,000 in five year CD'S in October of 2007 yielding 4.89%. My banker tried to discourage me and even called in another person with a coat and tie to talk with me. Maybe because I was in old work clothes I looked dumb I know many here would say that was a stupid move but it sure looks good now

 

[braumeister]

As junk goes, the Vanguard High Yield is regarded as the premium pick for those who enjoy a less junkier grade of junk. For that reason I wouldn't stray too far away if you like high yield with low (er) risk.
If you believe interest rates will rise, you might want to consider a floating rate fund. The FIDO FFRHX is considered one of the better ones.

I recently got some FFRHX, too. Seems to make sense for me.
Never have invested in junk with the exception of VWEHX, and probably won't. Much prefer individual bonds, but I was awakened rudely a couple of years ago when a supposedly safe muni went into default. Fortunately, they were able to call the bond at par when they got bought out after bankruptcy, but it sure got my attention!

 

[LOL!]

I don't think it is ever a good time to buy junk bonds. If you read "Liar's Poker" by Michael Lewis there are a few pages about the junk bond market. It will turn you off from them.

Here is another insight: A junk bond has many characteristics of a stock. Just because the name says "bond", many folks believe it is not like a stock. You want your bonds to pay dividends and not go down in value when stocks go down in value. You don't need your bonds to go up in value because your stocks should go up in value when stocks go up in value. So if you plot the "growth of" your junk bond fund along with a stock index fund and say the total bond index fund, what do you see? You see the junk bond fund going up and down with the stock index fund. Your eyes should tell you that the junk bond fund acts just like a stock fund. I have attached a plot for you.

So when folks say, "Oh, my junk bond fund has done great" I just chuckle. They could have just bought a stock fund instead. Or they could've bought Wellesley. Or a combo of a non-junk bond fund and a stock fund.

Thus nun's question in the thread title is really: "Is now a good time to buy a stock fund?"

 

[brewer12345]

I recently got some FFRHX, too. Seems to make sense for me.

Be aware that the loans in this fund are junk as well. Just like junk bonds, "leveraged loans" also got destroyed in the crash.

 

[brewer12345]

I don't think it is ever a good time to buy junk bonds.

I would say that this is an extreme view (which you are welcome to). There are excellent times to buy (and sell) junk; fortunes have been made doing so.

 

[ERD50]

I don't think it is ever a good time to buy junk bonds.

.... So if you plot the "growth of" your junk bond fund along with a stock index fund and say the total bond index fund, what do you see? You see the junk bond fund going up and down with the stock index fund. Your eyes should tell you that the junk bond fund acts just like a stock fund. I have attached a plot for you.

LOL - While I agree that a junk fund acts somewhat like a stock fund (I enter mine as 50-50 for AA purposes), that chart appears to be NAV, right? If so it is quite misleading, you need to look at total return. The chart makes VWEHX look like it's down ~ 7% over 5 years, while it is actually up 6.33% (whoops, that isn't just "up" overall, it's annual compounded, see math below) per Vanguard.

Ahhh - here's performance charts from Vanguard:

Final numbers (mouse-over at Vanguard to get them) were $13,591 for junk, $11,562 for Total Stock Market. (1.0633^5=1.359186553)

-ERD50

 

[LOL!]

I would say that this is an extreme view (which you are welcome to). There are excellent times to buy (and sell) junk; fortunes have been made doing so.

That's exactly like saying:

There are excellent times to buy (and sell) stocks; fortunes have been made doing so.

 

[LOL!]

ERD50, thanks for the chart. I'm not writing that VWEHX has 100% stock characteristics. It's a mixed of bond-like and stock-like properties. So rather than buying a a junk bond fund, one could buy a mix of stocks and high-quality bond fund.

Suppose one want an asset allocation fo 60% stock and 40% bonds. Would any junk bond folks advocated a 40% holding in junk bonds to the exclusion of other bonds? The portfolio would certainly not have the same risk characteristic of traditional 60:40 portfolio.

Does a portfolio of 60% stocks, 30% investment-grade bonds, and 10% junk bonds behave like a portfolio of 65% stocks and 35% investment-grade bonds?

 

[ERD50]

I don't think it is ever a good time to buy junk bonds.

https://personal.vanguard.com/us/funds/snapshot?FundId=0029&FundIntExt=INT#hist=tab:1

Mouse over the DEC 2008 area, and tell me that wasn't a good time to buy junk.

Sure, that is cherry-picked and a rear-view mirror look, but you did say 'never'.

And I'm not recommending junk to anyone. I've actually done pretty well with mine, but I did get in at what turned out to be good times, and I probably wouldn't call this a good time, but I know nothing.

-ERD50

 

[nun]

10% is a large allocation to junk imo but if you use it as an equity allocation then maybe not. junk bonds typically do well when the equity markets do well and this year "looks" to be a good year, we'll see. however, the time to buy the vanguard fund was dec 2008 when the nav was down in the low to mid $3 range! i bought some in the mid $4 range, it is just 5% of my total holdings. if it looked like the equity markets were about to crash then getting out may be wise. however, as that nav drops the yield goes up, in 12/08 it was around mid 13% or 14%!

As my junk is Vanguard High Yield I count it as 50/50 equity/bonds. I've been in it through the lows and dollar cost average into it. majority of my bonds are vanguard Total Bond Market and Wellesley, but I'm doing a bit of strategizing (dangerous I know) and want to reduce the Total Bond market %age as I'm not to optimistic about Gov debt. Maybe increasing the investment quality corporate bond allocation with some VFICX would be a good move

 

[Texas Proud]

https://personal.vanguard.com/us/funds/snapshot?FundId=0029&FundIntExt=INT#hist=tab:1

Mouse over the DEC 2008 area, and tell me that wasn't a good time to buy junk.

Sure, that is cherry-picked and a rear-view mirror look, but you did say 'never'.

And I'm not recommending junk to anyone. I've actually done pretty well with mine, but I did get in at what turned out to be good times, and I probably wouldn't call this a good time, but I know nothing.

-ERD50

I am sure LOL will answer.... but from what I read in his earlier post... the junk fund acts like an equity fund and IF you would have bought an equity fund in Dec 2008 you would have done better.... hence, never buy junk....

Sooo, IOW, junk is more like equity... and if you want the benefits of a bond, buy bonds and not junk... if you want the benefits of equity (and he is saying it is equity in a way)... buy better equity...

But that is how I interpret what he posted and I could be wrong...

 

[brewer12345]

That's exactly like saying:

There are excellent times to buy (and sell) stocks; fortunes have been made doing so.

Which is also true.

The difference is that it is a lot more obvious when junk is a "fat pitch" and the downside is generally a lot lower for getting it wrong than is the case with equities.

YMMV

 

[ERD50]

I am sure LOL will answer.... but from what I read in his earlier post... the junk fund acts like an equity fund and IF you would have bought an equity fund in Dec 2008 you would have done better.... hence, never buy junk....

Sooo, IOW, junk is more like equity... and if you want the benefits of a bond, buy bonds and not junk... if you want the benefits of equity (and he is saying it is equity in a way)... buy better equity...

But that is how I interpret what he posted and I could be wrong...

Well, a mouse-over using VTSMX as the benchmark will show you. Here are the #'s; left column DEC-2008, right Column DEC2010 followed by % gain. Never say never.


VTSMX $6,181 $9,488 53.50%
VWEHX $7,257 $12,305 69.56%

-ERD50

 

[DeborahB]

Everyone in this discussion - except me - seems to buy "junk" bonds not individually but in mutual funds. Your risk is reduced by their being in a mutual fund. Theoretically. Make sure the manager is competent.

As interest rates go up, bond prices go down, as I'm sure everyone here should know. I much prefer to buy a short-term bond and hang onto it until maturity and have control over what's going on. I worry about what will happen to my bond funds (the inherited ones) when interest rates go up and the NAV almost certainly will go down (and I watch them...). I keep them mainly to diversify my investment portfolio.

So what's the case for mutual funds? Is it just that you don't have to manage your money so much?

 

[dex]

I wouldn't say this is a good time to buy HYB.
Best Bond Strategy with Fidelity Capital and Income Fund

http://www.ttheoryfoundation.org/fidelity-capital-and-income-fund-ts.html

Its basic operation is to own the safer, lower yielding Vanguard US Government Bonds when confidence in the economic outlook is declining, then switching to the higher yielding Fidelity Capital and Income once the Federal Reserve makes it clear they are committed to pulling the economy out of a crisis situation.

 

[LOL!]

@Texas Proud +1.

So, ERD50, is this a good time to sell junk?