Gross to junk bond junkies: Curb your enthusiasm

High-yield market isn't overheated yet, but it's getting close, he contends

Feb 27, 2013 @ 10:30 am

By Jason Kephart

Gross, high yield, junk bonds, Pimco
+ Zoom
((Photo: Bloomberg News))

Pacific Investment Management Co. LLC's Bill Gross isn't ready to say that the high-yield bond market is overheated, but that it is getting there.

In his newest investment outlook, he estimates that the high-yield market is at about a 6 on a scale of 1 to 10 measuring asset price irrationality, and the market is moving higher.

“Corporate credit and high-yield bonds are somewhat exuberantly and irrationally priced. Spreads are tight, corporate profit margins are at record peaks with room to fall, and the economy is still fragile,” Mr. Gross wrote.

It isn't the current prices, which have compressed the spread between high yield and Treasurys, that concern him. Instead, it is the record amount of issuance flooding the market.

Mr. Gross points to research by Harvard University's Robin Greenwood and Samuel Hanson that showed that the new issuance of bonds is a better measure of future growth than spreads.

“When the high-yield share [of issuance] is elevated, future returns on corporate credit tend to be low,” the research paper concluded.

Last year, investors bought more than $100 billion worth of high-yield bonds and leveraged loans, higher than the previous peaks in 2007 and 2006.

Still, Mr. Gross isn't advising that investors ditch their junk bonds altogether, but he does caution that investors should curb their enthusiasm.

“Recent double-digit returns are unlikely to be replicated and when today's 5% to 6% high-yield interest rates are adjusted for future defaults and recovery values, 3% to 4% realized returns are the likely outcome” he wrote.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

Events

What are advisers clamoring for in the tech space?

Advisers have made their needs known, and fintech firms are listening. Hear from the experts at Fuse what they're doing to help advisers build and scale practices.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

HighTower faces pressure to let investors cash out

After an IPO planned for last year didn't happen, the company could opt to satisfy its backers with a sale.

Envestnet to buy FolioDynamix

The deal, which is expected to close in the first quarter of 2018, will bring the total assets Envestnet works with to almost $2 trillion.

Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry

After a decade of litigation, fees are lower and retirement plans are more transparent. But have the lawsuits gone too far?

10 best financial adviser jokes

How many financial advisers does it take to screw in a lightbulb?

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print