5 Reasons Why Junk Bonds Are A Great Buying Opportunity Now

 | Jan 23, 2016 06:15PM ET

Summary

  • The High-yield bond sector has been thrown into turmoil because of falling oil prices. High yield Bond spreads are at a multi-year high.
  • Mainly “oil related companies” and certain areas in the emerging markets are at risk. However the entire sector is being dumped indiscriminately.
  • I will provide in this article 5 strong reasons why certain Junk Bonds offer a “great opportunity to buy”.
  • I will also highlight 5 Criteria to keep in mind when looking to invest in high yield Junk Bond Closed-End Funds (CEFs).

Situation in the High-Yield Bond Sector
Sentiment towards high-yield debt has deteriorated this month after sliding for much of last year. The market has been unable to escape this month's pronounced decline for equities and oil dropping below $30 a barrel. Popular high-yield junk bond ETFs have fallen to lowest since 1967 . Stricter mortgage loan regulations adopted by banks after the last financial crisis have contributed to financial stability. Large banks have largely pulled back from mortgage lending to those with weak credit histories.

  • US stock market prices are slightly overpriced today, but not by much. The current S&P historical average of the S&P P/E ratio is 15.5, with the last ten year averaging at 13.5.
  • Commodity prices are at a multi-year Low, contributing to deflationary effect across the world. The Bloomberg Commodity Index, a measure of returns from 22 raw materials, from eggs to natural gas, is at its lowest since at least 1991 , extending the agony of energy, industrial metals and agricultural commodities producers.

  • 5- Aggressive Quantitative Easing (QE) across the World
    With Europe, Japan, and China all facing deflation and lower growth, they are all likely to increase their continued aggressive Quantitative Easing (QE), by further easing money supply and lowering interest rates. This will keep supporting demand for high yield products, including dividend stocks and Junk Bonds. Furthermore since October 2014 . Unattractive Treasury yields returns will keep demand for high-yield products strong, especially for income-hungry investors, baby boomers, and retirees.

    Five Criteria to keep in mind when looking to invest in "high-yield" Junk Bond Closed-End Funds (CEFs)

    Closed-End Funds (CEFs) currently offer one of the best way to enter the Junk Bond sector, as discount to Net Asset Value (NAV) is running high, thus providing some of the highest dividend yields. The following is a small list of such CEFs with their corresponding yield and discount to Net Asset Value:

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    Naturally, not all the Junk Bond space is safe. If an investor is looking to invest in high yield today, I would suggest looking for a
    Closed-End Fund with the following 5 criteria in mind:

    1. Little or no exposure to the oil and gas sector.
    2. Low exposure to the lowest-grade CCC bonds, which are much riskier with higher default risk.
    3. Low exposure to China and other Asian emerging markets.
    4. A fund with an active management strategy that avoids high-risk areas.
    5. A high discount to "Net Asset Value" (NAV) providing an opportunistic buying opportunity.

    Rida Morwa

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