bonds high yield oil OPEC

“We Wish We Bought Every Bond In The Index”: High Yield Knocks It Out Of The Park

"The fundamentals still are not that great"...

I've been skeptical about the prospects for HY bonds (and especially HY energy) for some time now. My skepticism has not dissipated. In fact, the incredible returns one could have earned by being in HY in 2016 make me even more incredulous. Remember, when it comes to HY energy, we're very often talking about cash flow negative US E&P names that rely on access to capital markets to plug their funding gaps. The following table is a bit dated, but it illustrates the point: (Table: Citi) See here's the thing: a lot of these businesses should have gone under long ago, but between the Fed (keeping rates artificially suppressed drives a hunt for yield and thus ensures there's plenty of investor appetite for HY credit no matter how risky) and more recently, rebounding oil prices, the market has been stripped of its ability to weed out insolvent businesses. Thus we get "zombie" companies. Here, for those who haven't seen it before, is the zombie creation cycle: (Chart: Citi) Bear in mind that the herding into risk assets means retail investors diving into vehicles like HYG. Trade in the underlying bonds is still relatively thin. That begs the obvious question: what happens wh
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1 comment on ““We Wish We Bought Every Bond In The Index”: High Yield Knocks It Out Of The Park

  1. wml789 says:

    There were a lot of HY energy ( mainly non E&P), that were severely undervalued in Feb 2016. As you state upstream is not out of the woods by any means. Made just over 46% this year on non upstream energy companies.

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