Gross to junk bond junkies: Curb your enthusiasm

High-yield market isn't overheated yet, but it's getting close, he contends
AUG 20, 2013
By  JKEPHART
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.

Latest News

Maryland bars advisor over charging excessive fees to clients
Maryland bars advisor over charging excessive fees to clients

Blue Anchor Capital Management and Pickett also purchased “highly aggressive and volatile” securities, according to the order.

Wave of SEC appointments signals regulatory shift with implications for financial advisors
Wave of SEC appointments signals regulatory shift with implications for financial advisors

Reshuffle provides strong indication of where the regulator's priorities now lie.

US insurers want to take a larger slice of the retirement market through the RIA channel
US insurers want to take a larger slice of the retirement market through the RIA channel

Goldman Sachs Asset Management report reveals sharpened focus on annuities.

Why DA Davidson's wealth vice chairman still follows his dad's investment advice
Why DA Davidson's wealth vice chairman still follows his dad's investment advice

Ahead of Father's Day, InvestmentNews speaks with Andrew Crowell.

401(k) participants seek advice, but few turn to financial advisors
401(k) participants seek advice, but few turn to financial advisors

Cerulli research finds nearly two-thirds of active retirement plan participants are unadvised, opening a potential engagement opportunity.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today’s choppy market waters, says Myles Lambert, Brighthouse Financial.

SPONSORED Beyond the dashboard: Making wealth tech human

How intelliflo aims to solve advisors' top tech headaches—without sacrificing the personal touch clients crave