As the Fed prepares to raise rates for the first time since 2007, the corporate high yield debt market, aka the junk bond market, is in serious crisis mode. The talking heads on TV say that everything is fine if you exclude energy but this is eerily similar to them saying that the S&P is fine excluding financials in 2007.
First Half 2014 in Review: Melt up!
I've been in the business for almost 17 years now and I can't remember a time when virtually all assets classes went up together. Needless to say these are highly unusual times. If you have investments, you should send a thank you card to the central bankers for their easy monetary policy. The ECB is trying negative rates. The Fed's balance sheet is over $4.3 trillion. The Bank of Japan is buying assets faster than the Fed! While this may not end well, the financial markets are partying like it's 1999. With that said let's take a look back at the first half of 2014.
2013 in review: US Stocks win the race
Equities reign supreme
As we look back on 2013, investors will smile wide at the US stock market indices hitting historic highs. Not only did US markets have an outstanding year but they doubled the return of international indices. The once popular BRIC investing theme actually finished with 3 of the 4 BRIC countries in the red. The countries that went bankrupt in the financial crisis rose from the ashes as Greece, Ireland and Iceland were all up over 29%. Volatility was crushed by the running bulls as the VIX was down over 30%.
Equity Management More Important Than Ever Before
In the years 2010-2012, investors around the world poured nearly $700 billion into bond funds, while taking nearly $300 billion out of stock funds. That was then, this is now. Today, more investors view the bond market as abnormally risky and are concerned that recent bond losses could deepen if interest rates continue to rise. ZIRP (zero interest rate policy) has come at the expense of savers and conservative investors, among them are retirees and captive insurance companies. Without an ability to find a risk-free return, much less a low-risk return, many investors have moved and continue to move into riskier assets in order to generate some returns.
Are your bond assets safe in a rising rate environment?
The bond bull market has been running hard for over 30 years but it appears to be over as long-term rates hit historic lows in 2012. Many investors have never lived through a rising interest-rate cycle and aren't prepared for a secular bear market in bonds. As you can see in the chart below, the last bond bear market lasted just as long as the current bull.
Rising rates can inflict significant damage to bond assets which are supposed to be the safe side of an investment portfolio. When interest rates rise, the market value of bonds falls and the losses can be substantial.