Investors junk high-yield

In an earlier Super Advisor article (High-yield securites: eyes on the exits) we highlighted the risk that we're at a turning point for high yield - junk bonds and hybrids - with possible implications for other high yielding assets.

This blog post (from soberlook.com) again highlights the risk. Due to extreme global monetary policy, a lot of investors have been chasing higher yields and there's every chance many of them haven't focused enough on risk or fair value.

The concern, highlighted in the comment 'what worries some HY investors is that junk bond pricing is very dependent on fund flows', is that a flow of funds out of the sector sets off a cascade of falling prices and fund outflows. A downturn in high-yield could easily become an avalanche.

From an Australian perspective the issue is the hybrid market. In asset classes dominated by retail investors (like hybrids) avalanches can easily occur. Retail investors tend to go with the flow - they read the same material and follow similar advice - so 'worth a buy' has a habit of becoming a mad rush and 'probably time to sell'.

I doubt there are many retail investors who've put a fair value on, say, ANZ Capital Notes, and are ready to step in and buy if the price hits $95. More likely, a dip down to $95 could easily become a fall to $85... or $80.

It's the assymetric nature of the junk bond beast: decent but not spectacular returns when things go swimingly combined with downright nasty losses if they turn against you.

If you're an investor in hybrids or other junk bonds now more than ever you should have 'one eye on the exits'.