Tags: china | yuan | investors | economy

A Look at High-Yield Bond Risk

By    |   Monday, 17 Aug 2015 07:43 AM

Tim Jagger, senior vice president and portfolio manager of Aviva Investments, contends that even a devaluation as large as the 3 percent to 4 percent that has occurred in the Chinese yuan is not going to affect the creditworthiness of Chinese borrowers; it would take something more on the order of 20 percent to do that.

Jagger considers such a large move merely a “tail risk.”

Another CNBC panelist, Ferris, agreed but threw into the discussion the question of what effect a Fed interest rate hike would have.

Jagger responded that performance of Asian high-yield bonds is normally OK for the first couple of moves unless there is concern about defaults.

This writer would note that most pundits seem confident that there would only be one or two increases, an assumption that should not be taken for granted.

Jagger added that lenders count on spreads, rather than rates, for most of their returns. He observed that rates will increase in order to remove the exceptional accommodation that has prevailed for years.

He described the outlook for defaults in Asia and elsewhere as “still relatively benign.”

He insisted that while the credit environment is “getting more tricky,” investors rely on credit analysis teams to differentiate credits in “this more volatile environment,” and they should be content with “decent returns.”

Susan noted Asian high-yield bonds have yielded 6.7 percent, a point over conventional bonds, and she asked how long this can continue.

Jagger estimated the spread as much larger, 5 percent versus 2 percent for most U.S. bonds, which he attributed to energy components in the U.S. high-yield market.

He expects the spread to narrow so that performance will still be “OK,” rather than stellar.

This writer brings up the topic for the purpose of placing a marker for the idea that these expectations could prove to be wrong.

Friday marked the advent of options in shares of Shake Shack (SHAK), and Melissa Lee asked Mike Khouw why only 1296 calls and 486 puts traded.

Khouw responded that spreads were wide and traders found prices “confusing” because the stock has a small float and a high short interest, which makes it hard to borrow, and this is reflected in prices that imply a price of $47 for the stock in January, now selling for $55.35, down from close to 100.

Dan Nathan noted that call volume was more than 2.5 times that of puts, and he said the main point is that spreads are very wide and prices high. He suggested that while it is better to buy calls than to buy to stock, the price is predicting that the stock will go lower.

Nathan pointed out that for those who own the stock, the options offer a chance to increase returns by selling calls against it. This writer brought up the topic in order to illustrate that it is best to look for options in stocks with greater liquidity.

Next, expect a big fuss this week over release this Wednesday of the latest minutes from the FOMC. Channing Smith, managing director at Capital Advisors, described market observers as “obsessed” with the question of what the minutes will say about the Fed’s intentions.

He said “it’s a coin flip” as to whether the hike will occur in September, but he also identified himself as a member of the “one and done” camp that expects merely a symbolic move.

He recommended investors look for stocks yielding 4 percent-6 percent and that they should “be careful,” because the Fed has never before operated with a balance sheet as large as the present $4.5 trillion.

Finally, the "Fast Money" crew looks at the earnings of big box retailers, where Mike Khouw finds earnings good but thinks a “secular shift” is going on, and he is not “especially enthusiastic” about Target (TGT) and Wal-Mart (WMT), with the latter growing only 1%-2%, “actually shrinking” compared to an economy that is barely growing and compared to Amazon (AMZN).

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Robert-Feinberg
Tim Jagger, Senior VP and Portfolio Manager of Aviva Investments, contends that even a devaluation as large as the 3 percent to 4 percent that has occurred in the Chinese yuan is not going to affect the creditworthiness of Chinese borrowers.
china, yuan, investors, economy
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2015-43-17
Monday, 17 Aug 2015 07:43 AM
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