Written by Nathan White, Chief Investment Officer of Paragon Wealth Management

Simply amazing.  Junk bond indexes and funds should now
drop the “High Yield” description that they use in their names.  With
these bonds now yielding around 5% we have sold out of most of our positions in
this area.  At this level the returns are just not worth the risk.
That doesn’t mean junk bonds will blow up any time soon but we would rather
sell high and take what the market is giving us at this time.  Junk yields
at 5% are a direct consequence of the Fed’s Zero Interest Rate Policy as
investors fight for anything with yield.  It wasn’t too long ago when you
could get 5% on a money market!

To view the entire article please visit: barrons.com

Here is an exerpt from the article:

The 5% yield barrier has proved no match for this Federal
Reserve-fueled junk-bond market, which last night reached yet another all-time record-low average yield-to-worst of 4.97%,
according to the Barclays US
High Yield Index. It marked a new level of market capitulation to central-bank
forces as it’s the first time the index has dipped below 5% in its 30-year
history (before January the market had never even fallen below 6%). The average
price of 107.31 cents on the dollar also marks a record high.

The other
widely followed market index, the Bank of America Merrill Lynch High Yield Master II Index, closed
last night within a whisker of 5%, at 5.005%, with the average dollar price
closing above the 107-cent mark for the first time ever at 107.20.

“The most
surprising thing this shows is that there’s really no yield floor for this
market,” says Brad Rogoff, head of credit
strategy at Barclays. “Those mental barriers really haven’t existed that we
thought existed maybe a year ago.”

With the Fed
and central banks around the world keeping interest rates near zero and pumping
money into the financial system, investors have been encouraged, if not forced,
to invest in the highest-yielding investments around, even if those yields
aren’t that high anymore. All this liquidity and low borrowing costs have
helped companies shore up their balance sheets, and default rates remain
negligible, which further emboldens investors to take on credit risk.

Rogoff says
the high-yield market’s main attraction used to be – as its name would indicate
– its high yields. At sub-5% average yields now, the market’s main
justification is its comparative yield versus other types of bonds, namely its
risk premium over Treasuries. The option-adjusted spread on the Barclays index
stands at 406 basis points over Treasuries, below its historic average but
still far wider than the historic tight of 233 bps reached on May 23, 2007. The
spread of the Bank of America index stands at 424 bps, above its all-time low
of 240, also recorded in May 2007.

“Usually this
is a market that’s traded based on yield, but now it feels like it’s trading
based on spread. It’s much tougher to justify based on historical yield
standards but on spread, its reasonable,” Rogoff says. The average spread could
still tighten a bit more, he adds, but any further tightening “is not
necessarily in conjunction with where rates are now,” meaning Treasury rates
would have to rise before junk bond spreads compressed much further, leaving
all-in junk-bond yields more or less where they are now.

The average
dollar price of 107 cents presents another problem, since many junk bonds can
be called by their issuer beyond a certain date at 103 cents on the dollar.
Rogoff says roughly half of the market is currently trading above its first
call price. “Those call dates typically are not tomorrow, but the market is
definitely constrained,” he says. “A year ago, you would have thought there was
a yield floor created by a dollar price constraint.”…….

To view the rest of the article, please visit: barrons.com

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.