“We don’t think high yield bonds are any more vulnerable to rising rates than other fixed income instruments. We don’t downplay the risk in the market nowadays and the fact that bond prices are quite high,” wrote Howard Marks and Sheldon Stone at Oaktree Capital Management in a recent memo to investors.
“However, the situation isn’t unique to high yield bonds; rather, it is true of virtually all bonds and reflects the concerted effort on the part of central banks around the world to hold down interest rates,” they noted. “Yields are at historic lows and prices are unusually high all across the fixed income spectrum.” [High-Yield Bond ETFs Can’t Shake Bubble Talk]
Michael Holland, chairman of Holland & Co., told Bloomberg that bond prices are acting like dot-com stocks during the Internet craze. “I’ve been in the business for 40 years, and the reality is that we’ve never had a situation like this because this is totally manufactured by the Fed,” he said.
“The interest-rate risk is just a law of nature,” said Craig Packer, head of Americas leveraged finance for Goldman Sachs, referring to junk bonds.
“I don’t know if it will be this year, but five years from now we’re going to look back and realize that investors were taking on real interest-rate risk when they were buying any of these products and that risk came to fruition,” Packer said in the Bloomberg story. “I feel pretty comfortable predicting that. It’s not the 2006-2007 credit risk. It’s the 2013 interest-rate risk.”
Full disclosure: Tom Lydon’s clients own HYG and JNK.