WHY JUNK BONDS ARE... JUNK BONDS
Majority of traders are greedy – either bad greed or savvy greed. Nevertheless, they are the very reason for the inception of junk bonds.
Many investors are much willing to purchase junk bonds as the instrument yields more than 7%. Good catch, right? Not at all. What many investors fail to realize is that they are purchasing high-yield bonds from entities with massive debt obligations. A Fitch data indicated the default rate for junk bonds was 3.4% in December 2015. And NYU professor Edward Altman projected the default rate this year will touch 4.6%.
Barclays said junk bonds in energy, heavy industrial, and pharmaceutical sectors have dropped as well. Also, prevailing economic situations and prospective future trends imply a plunge of more than 40% in 2016.
Do not expect these investors to analyze the charts, read message boards or corners, or watch the latest news on TV. The savvy greed traders instead work hard and do their own diligence, believing it will give them an investing advantage.
Remember, investing in high-yield bond takes a lot of research and assessment. Unless they are producing an in-depth report, media entities won’t exert more time and effort to do their research. Message board won’t do the same. Junk bond investing also look at fundamentals, specifically the status of such bonds. However, it does not mean technical analysis is rendered useless. Some scenarios in history prove establishing short positions lead to positive results.
With the way things are going, the world is on the edge of a massive reset because of the possibility of further interest rate hikes, global deflationary forces, and liquidity of central banks. Several companies are scrambling to cut their expenses to maintain their operations. In the event borrowing costs escalate, their landscape will change especially those in the energy sector. And if oil does not recuperate, energy entities won’t be able to settle their debts upfront. This sector issues around 60% of high-yield bonds.
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