April 16, 2010 – Bubble Rages in the Junk Bond Market

Featured Trades: (JNK), (HYG), (PHB)


4) Bubble Rages in the Junk Bond Market. The junk bond market is entering positively bubblicious territory, tracking the upward ascent of stocks almost step for step. The high yield ETF’s (JNK), (HYG), (PHB) have now nearly doubled since I recommended them a year ago (click here for the call). The amazing thing for me is that this meteoric climb is happening in the face of a Mount Everest sized $1.2 trillion wall of junk refinancing that has to take place over the next four years. Just for the record, the all time high for new high yield floatations occurred in 2006, with $260 billion in new paper issued. Junk refinancings are going to have to compete for money against similarly sized borrowers from private equity, commercial real estate, and of course, the US government, at the same time. ‘Crowding out’ will become the catch words of 2012 and 2013. To me it looks like the proverbial flash fire in the movie theater is setting up, where the first two out the door survive, and everyone else gets burned to a crisp. If there is even a hint of a double dip recession, this sector will be the first to vaporize. Yet, another road leads to the TBT, and sell some 30 year Treasury bond futures on the next rally while you’re at it.

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