The question here is simple… Are junk bonds being sold off by too much?

In many cases the high yield junk bond sector is like investing in equities.  Unlike Treasury bonds, for now at least, junk bonds carry credit risks that the bond market does not.  The difference is that you can easily find dividend yields of 7%, 8%, and even higher.

iShares iBoxx $ High Yield Corporate Bond (AMEX: HYG)- was down 1.4% at $87.59 against a 52-week $77.90 to $92.67.  The indicated yield here is 7.25% based on the last payment.

SPDR Barclays Capital High Yield Bond (AMEX: JNK) was down 1.3% at $38.19 against a 52-week range of $34.09 to $40.89.  It had a 7.2% indicated yield based on its last payment.

PIMCO High Income Fund (NYSE: PHK) was down 0.9% at $12.64 against a 52-week range of $10.52 to $14.88 and its yield was about 8.3% based on the last dividend.

Other closed-end funds were down 3% and more on Thursday:

Invesco High Yield Investments Fund, Inc. (NYSE: MSY) was down close to 3% at $6.07 against a 52-week range of $5.25 to $6.83 and with an 8.8% yield.

Western Asset High Income Opportunity Fund Inc. (NYSE: HIO) was down over 3% at $6.11 against a 52-week range of $5.34 to $6.58 with a yield of close to 8.4%.

BlackRock Corporate High Yield Fund V, Inc. (NYSE: HYV) fell by over 3.3% down to $12.02 against a 52-week range of $10.10 to $13.13 with a yield of 8.6%.

When you get a free fall on these you often cannot ever catch the ultimate bottom all at once.  In fact, the performance of these during the recession and during certain times of panic selling as we have seen in each of the last two summers has been dismal.  The trick is the timing.  Rewards usually await for those who catch junk bonds after they start to bottom out.

JON C. OGG

What has changed in the last two weeks is Europe.  Two weeks ago it was not expected that France was going to suddenly issue a citizen-wide veto of the austerity measures.  Now that Sarkozy has effectively lost to Hollande in French elections, France is taking a socialist step and is effectively boycotting its austerity measures.

The move in France followed an inability for the Dutch to reach a budgetary agreement, and now we have Spain back in trouble.  To add insult to injury, the new Greek politicos are just wanting to break the agreed-to austerity measures that allowed it to avoid default (as if you should be surprised there!).  Now we have Ireland even calling anti-austerity sounds with an implied return of Sinn Fein in the public.

So, back to bonds… The 10-Year Treasury Note is now yielding 1.81%.  If you go back and review the charts, the 1.80% acted as a yield floor in February of 2012 and in December of 2011.  In September and October of 2011 the floor was closer to 1.70% as an absolute low, but when that came off the 10-year note yield rose 30 basis points in just over a week. The 10-Year note was yielding 2.20% as recently as April 5, 2012 and had risen to 2.40% as recently as March 20, 2012 (after having risen 40 basis points in just 9 trading sessions).

Now we have a 30-Year Treasury “Long Bond” yield back at almost 3%.  For the “Long Bond” yields to be back at the real lows it has to drop to about 2.90% and ultimately about 2.80% as the floor in September, October, and again in December of 2012. The 30-Year yield was at 3.40% as recently as April 4, 2012.

Credit Suisse just lowered its S&P 500 target to 1,450 from 1,470 this morning and it has increased the odds that both Greece leaves the Euro and also that the Euro could dissolve entirely.

iShares Barclays 20+ Year Treasury Bond (AMEX: TLT) has risen almost $10.00 per share since March 20, 2012 and that shows just how much interest has been there from what are normally equity investors who are preferring to Buy exchange-traded Treasury debt products.  Its yield is currently about 2.85%.

Junk bonds have lost their luster again, and it was only a week or so ago that the index was hitting a new high.  SPDR Barclays Capital High Yield Bond (AMEX: JNK) recently peaked above $40.00 and it is now at $39.50.  Investors have also turned away from the high-payout MLP sector as the JPMorgan Alerian MLP Index ETN (AMEX: AMJ) product recently peaked at almost $42.00 and it is now under $38.70 despite what is a high ‘yield equivalent’ for investors.

The banking sector surged in the first quarter but it has pulled back substantially.  The Financial Select Sector SPDR (AMEX: XLF) peaked at $16.20 and it is now down at almost $14.90 for what is getting closer to a 10% correction.  The highly volatile and leveraged Direxion Daily Financial Bull 3X Shares (AMEX: FAS) peaked around $110.00 per share at the end of March and start of April and it is now challenging the $94.00 price.  Banks and financials are back out of favor, mostly due to fears about Europe dragging them down.

The real question is whether or not this is the signal of the next recession or whether this is a trade for the “Sell in May and go away!” theme that investors are more worried about.  All growth indicators from non-farm payrolls, purchasing managers, and manufacturing and services activity readings are pointing so far to what is just slower and slower growth.

In the United States, Q1-2012 GDP was up at only +2.2% as government spending was down by 3% in the quarter.  Europe is in all but a deep ‘official recession’ per most of its latest economic reports.  The growth in China and Brazil has seen a tempering throughout this year as well, with other key emerging markets like India and others in South America still seeing slower and slower growth.

The good news against the recession argument is that economists after the last earnings season still seem to be calling for positive growth in U.S. GDP in the second quarter at least as of now.  If that holds true and if the U.S. can avoid getting pulled down by Europe, then perhaps the U.S. will avoid an official recession even if this current growth is rather pathetic.  We also have an election and it is a near certainty that both Presidential candidates are likely going to say whatever they can get away with to win the election in November.

If Q2 does not show negative on the GDP front in the United States, then technically no recession can be declared until early in 2013.  That would coincide with what Ben Bernanke has warned about the financial cliff facing the United States at the end of 2012 and it is when the new tax structure takes place.

The market is definitely voicing concern here.  Is that a recession warning?  It depends upon your own outlook and upon your own interpretations.  It must also be noted that the current drop in stock prices is getting to be where stocks are getting close to ‘oversold’ on the short-term charts even if the fundamentals are of concern.

As a final reminder, stop kidding yourself about the notion of a double dip recession.  We have enjoyed close to three-years of positive economic growth.  If a recession comes again soon, it will just be ‘the next recession’ since a double dip recession has to occur with a couple or a few quarters of the prior recession.

JON C. OGG

SPDR Barclays High Yield Bond (NYSE: JNK) carries a 7.7% listed yield and is up 0.25% at $39.00 against a 52-week range of $34.09 to $40.93 and it is the primary ETF we look at when it comes to the world of high-yield or junk bonds.  Then there is the iShares iBoxx High Yield Corporate Bond (NYSE: HYG) up 0.1% at $89.69 with close to a 7.7% yield and a 52-week range of $77.90 to $92.85, followed by the PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSE: PHB) that is flat at $18.34 with a yield of about 6% and a 52-week range of $17.00 to $18.76.  You have to consider that the 10-Year Treasury yields close to 2%, but high-yield and junk bonds often pay 7%, 8%, or more.  Here are some of the top closed-end funds, although there are many more out there:

• Blackrock Corporate High Yield (NYSE: HYV): market cap of $396 million with shares up 0.3% at $12.02; 52-week trading range of $10.10 to $12.60; implied yield of 8.5%.
• Pioneer High Income Trust (NYSE: PHT): market cap of $480 with shares up 0.7% at $17.07; 52-week trading range of $14.12 to $18.08; implied yield of 9.6%.
• PIMCO High Income Fund (NYSE: PHK): market cap of $1.5 billion with shares down 0.1% at $12.62; 52-week trading range of $10.52 to $14.88; implied yield of about 8.5%.
• AllianceBernstein Global High Income Fund, Inc. (NYSE: AWF): market cap of $1.2+ billion with shares up 0.9% at $14.47; 52-week trading range of $12.43 to $15.41; implied yield of 8.3%.
• Western Asset High Income Fund II Inc. (NYSE: HIX): shares are up 0.4% at $9.84; 52-week trading range of $8.35 to $10.45; implied yield of about 10.0%.
• Western Asset High Income Opportunity Fund Inc. (NYSE: HIO): shares are up 0.8% at $6.32; 52-week trading range of $5.34 to $6.63; implied yield of 8.0%.

We do advise investors to study the current premium and discount that each closed-end fund trades at compared to the net asset value.  Some are discounts and some are premiums, and these can fluctuate wildly through time for a myriad of reasons.

While that is a composite and while the “BB” is now under 500 basis points over Treasuries, the “B” spread is now under 750 basis points over Treasuries.  Maturities matter here as the longer-dated notes and bonds command higher spreads than most shorter-dated instruments.  Still, this could be the beginning of a wave of continued interest in junk bonds.

What is interesting is that rising yields in Treasuries implies losses on the face value of bonds.  If the yields are rising because of an improving economic picture rather than because of inflation or because of a lack of faith in the underlying creditworthiness of the government, then the bond spreads are likely to contract further and that would drive the interest into high-yield junk bonds.

Be advised that not all junk bond funds are created equally outside of the ETFs.  Some closed-end funds use domestic junk bonds only, while some use international bonds.  Some include foreign-issue sovereign debt at junk levels or trading as though they are junk.  Aslo, some use a bit of leverage while others do not.  The dividend yields are “implied” because ethe closed-end funds pay monthly.

Another caveat needs to be mentioned… Some of the yields on financial quote screens also will differ from our implied yields because we do not include the capital gain distribution that comes with many of these.  They of course count toward your total return, but we like to look at the most recent ‘regular dividend’ when calculating yields.

We have provided a chart for the “JNK” ETF Below so you can see how much this sector has risen since Thanksgiving and then again since the selling climax of stocks and risk instruments (including junk bonds) in early October.

A true chartist would tell you to watch this current level closely.  If prices do not rise from here, it could be representative of a false break-out and that would imply a near-term top.  As long as the “risk-on” mentality prevails, these should do well.  The trick is watching longer-term Treasury yields.  With close to a 2% yield on the 10-Year Treasury Note, investors will seek higher returns as long as those returns are likely to have at least some degree of price stability.  If investors think that Treasury yields are likely to climb suddenly to 3% or even 4%, junk bonds will have some competition from the risk-free trade again.

As you would expect, there is no such thing as a free lunch in the financial markets.

JON C. OGG

It turns out that many stocks with high dividend yields are now more attractive than sovereign debt in the U.S. and abroad. Part of the allure, besides income or reinvestment, is that dividend stocks often hold up better than other investments during jittery markets. It is hard to imagine, but the high-yield utility sector was one of the top performers of the S&P in 2011. In some cases, half of an investor’s total return through time may come from dividends. Warren Buffett generally picks dividend-paying companies for Berkshire Hathaway Inc. (NYSE: BRK-A) after following some of the principles of Benjamin Graham.

The 24/7 Wall St. 2012 Model Dividend Portfolio includes the following stocks: American Electric Power Co., Inc. (NYSE: AEP); American Water Works Company, Inc. (NYSE: AWK); AT&T, Inc. (NYSE: T); General Electric Co. (NYSE: GE); Government Properties Income Trust (NYSE: GOV); Kimberly-Clark Corporation (NYSE: KMB); Senior Housing Properties Trust (NYSE: SNH); and Wal-Mart Stores Inc. (NYSE: WMT).

While exchange-traded products have been avoided in the past, recent trends merit a look at the open-end or closed-end mutual funds and ETF products as follows: SPDR Barclays Capital High Yield Bond (NYSE: JNK); JPMorgan Alerian MLP Index ETN (NYSE: AMJ); ALPS Alerian MLP ETF (NYSE: AMLP); and PowerShares Financial Preferred (NYSE: PGF).

Lastly, there have been some exits due to upside price performance: Altria Group Inc. (NYSE: MO); Digital Realty Trust Inc. (NYSE: DLR); Enterprise Products Partners LP (NYSE: EPD); and Kinder Morgan Energy Partners LP (NYSE: KMP).

We have described the features and outlook for each component of our Model Dividend Portfolio.

Direxion Daily Financial Bull 3X Shares (NYSE: FAS) is proving that financials can still manage to rally with the market.  The move is up 9.% at $53.87, mostly erasing the damage of last week.

Market Vectors Russia ETF (NYSE: RSX) is a beneficiary if Europe’s woes may find a beginning of the end.  This ETF is up 5.8% at $29.12, and the triple-leveraged Direxion Daily Russia Bull 3X Shares (NYSE: RUSL) is up a whopping 17.1% at $40.39.

SPDR Barclays Capital High Yield Bond (NYSE: JNK) is winning as spreads of junk bonds (and investment grade) tighten over Treasuries.  These often act more like stocks than real treasury-tracking bonds, particularly when credit spreads are so wide.

SPDR Gold Shares (NYSE: GLD) proves yet again that it is not just tracking gold as the fear trade.  Gold is becoming a risk-asset again and now mat be more tied to the performance of the S&P 500 Index rather than as “the fear trade” which we were so used to seeing.

JON C. OGG

Andrew Bary noted, “The junk-bond market has taken a big hit. It might fall some more, but patient investors will be rewarded. Anyone in search of income should take advantage of the hefty yields.”  He noted that prices are down 10% since the end of July and noted that the junk spreads have widened out to about 900 basis points from just 475 basis points in April.

The market has not yet caught back on if the Europeans are going to come up with a solution that allows for investors to put their “risk” trades back on.  The high dividends from interest collected in high-yield funds and ETFs have attracted investors for years and years when the investors believe the risk-reward is very favorable.  When Treasury notes, bonds, and CDs pay so little, 8% and 9% spreads over Treasury yields should start attracting the vultures. 

Two key ETFs for non-investment grade bonds are the iShares iBoxx High Yield Corporate Bond (NYSE: HYG) and the SPDR Barclays Capital High Yield Bond (NYSE: JNK) ETF.  The iShares iBoxx High Yield Corporate Bond (NYSE: HYG) is up 2.1% at $85.13 and it has a $77.90 to $92.85 range over the last 52-weeks.  The SPDR Barclays Capital High Yield Bond (NYSE: JNK) is up over 2% at $36.97, but it has a 52-week trading range of $34.09 to $41.32.

BlackRock Corporate High Yield Fund VI, Inc. (NYSE: HYT) is up 3.2% at $10.55 and its 52-week range is $9.94 to $12.23.

PIMCO High Income Fund (NYSE: PHK) is up some 4% at $11.84 and its 52-week range is $10.52 to $14.88.

Managed High Yield Plus Fund Inc. (NYSE: HYF) is up 3.7% at $1.94 and its 52-week trading range is $1.77 to $2.66.

Many of these were beaten up in sympathy with many other funds who had investments in sovereign debt of the PIIGS or in companies where the spreads were widening out substantially.  Earning a spread of 4.75% above Treasuries is already high, but a spread of 8% or 9% higher than Treasury yields starts to become astronomical on a risk-reward basis.  In short, a rise of that magnitude would be implying that expected default rates are going to rise from roughly under 2% to about 6% or more in the periods ahead.

If the United States manages to keep from falling back into a definite recession, the de facto yield spreads available in junk bonds have become a true bargain for income investors.

JON C. OGG

We have screened out several high-yield securities classes and several liquid names for each. iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG) and SPDR Barclays Capital High Yield Bond (NYSE: JNK) are two of the more liquid and common go-to exchange-traded products for investors looking for ETFs and ETNs in the high-yield universe. In the open-end mutual funds, these are ranked the highest by Zacks with a “#1 Rank” that are also considered a Strong Buy analyst rating which implies that they will outperform peers. Some of the top open-ended mutual funds screened by Zacks were Putnam High Yield A (PHIGX), USAA High-Yield Opportunities (USHYX), and Transamerica Partners High Yield Bond (DVHYX).  In the closed-end universe, we have shown the examples of Western Asset High Income Opportunity Fund Inc. (NYSE: HIO), Dreyfus High Yield Strategies Fund (NYSE: DHF), and BlackRock Corporate High Yield Fund VI, Inc. (NYSE: HYT).

iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG) aims to track the results of the price and yield performance, before fees and expenses, of the iBoxx $ Liquid High Yield index. The fund invests at least 90% of assets in securities that comprise the index, but it may invest up to 20% of assets in certain futures, options and swaps, cash and cash equivalents, and in bonds not included within the index.  With a price of $90.59, the dividends fluctuate monthly but the yield is actually well above 7% and is up almost 5% so far this year.

Another popular high-yield ETF is one with most appropriate ticker of them all… SPDR Barclays Capital High Yield Bond (NYSE: JNK) seeks to track the Barclays Capital High Yield Very Liquid Index and it invests at least 80% of total assets in securities that comprise its benchmark index.  With shares around $40.00, its trailing 12-month dividend profile is close to 8% in yield.

Putnam High Yield A (PHIGX) mostly invests in Junk-rated securities with maturity periods of three years or more. The fund may also utilize futures, options, warrants and swaps to minimize risk or to enhance portfolio returns. This high yield mutual fund returned 13.01% over the last one year period. This fund also carries an expense ratio of 1.04% compared to a category average of 1.18%.

USAA High-Yield Opportunities (USHYX) has a primary objective of high current income with a secondary objective of capital appreciation. At least 80% of its assets have to go into high-yield securities such as bonds, convertible securities and preferred stocks. The high yield mutual fund has a three year annualized return of 12.02%.  Zacks noted that this fund actually held some 482 issues, with 6.88% of its total assets invested in iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG).

Transamerica Partners High Yield Bond (DVHYX) has a primary objective of high current income and it invests in high-yield debt securities and preferred stocks. Zacks noted that the mutual fund has a ten year annualized return of 8.43% and it has an expense ratio of 1.10% compared to a category average of 1.18%.

There is also the world of closed-end funds, where investors get some of the same characteristics of open-end mutual funds along with some characteristics of ETFs.  Unfortunately, or fortunately, there is also the risk and reward of constant premiums or discounts to net asset values.

Western Asset High Income Opportunity Fund Inc. (NYSE: HIO) is one such closed-end fund.  Its current payout comes to an annualized yield of about 8.4%.  At $6.42, its 52-week range is $5.80 to $6.63, and its most recent premium to its net asset value was just over 2%.

Dreyfus High Yield Strategies Fund (NYSE: DHF) is a liquid closed-end fund with the example of a high premium over its net asset value.  At $5.05, its 52-week range is $4.01 to $5.14, and it trades at a premium close to 19%.  For such a premium, investors get a current payout rate close to 10% in yield.

BlackRock Corporate High Yield Fund VI, Inc. (NYSE: HYT) is another liquid closed-end fund that trades at a discount of close to 3% from its net asset value.  At $11.94, its 52-week range is $10.37 to $12.23, and its current payout generates a yield of close to 8.2%.

Many of these funds and ETFs are allowed to use leverage, or they can invest in “alternatives” other than just corporate debt.  If you broke out any individual security owned by these funds you will find almost none suitable for widows and orphans.  When you package these together, let’s just say that it takes several standard deviation events before the default rates start to eat heavily into those dividend yields.  Most importantly, please remember our most common investment mantra… “Regardless of what your objective, know what you are investing in.”

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Three of the more actively traded closed-end funds we track are Western Asset High Income Opportunity Fund Inc. (NYSE: HIO), Western Asset Managed High Income Fund Inc. (NYSE: MHY), and the PIMCO High Income Fund (NYSE: PHK).  Those are not the only closed-end funds at all but they are three of our go-to funds.  In ETF and ETN products we usually track iShares iBoxx High Yield Corporate Bond (NYSE: HYG) and the SPDR Barclays Capital High Yield Bond (NYSE: JNK).  The junk-bond ETF universe has made out much better in recent days than the closed-end fund segment of junk bonds.

Western Asset High Income Opportunity Fund Inc. (NYSE: HIO) is down another 1.5% at $5.90 mid-Monday, and its last ex-date for a $0.045 dividend was November 17.  Its website listed a 3.54% discount to an NAV of $6.21 but that is on its own site and may be delayed.  Shares were at $6.22 after that and that was the highest close of late back on December 1.  That represents a drop of some 5.1% this month so far.  Its 52-week range is $5.39 to $6.58 and the current dividend yield is listed as roughly 9.0%.

Western Asset Managed High Income Fund Inc. (NYSE: MHY) is down over 2% Monday at $5.80 and its last ex-date for the $0.05 dividend was November 17.  Its prior $5.93 price listed on the website was put at a 2.15% discount to its listed NAV of $6.06.  Shares entered December at $6.30, indicating a larger drop of roughly 8%.  Its 52-week range is $4.05 (from flash crash) and adjusted from roughly $5.50 to $6.74 in the last year and the current dividend yield is listed as roughly 9.6%.

PIMCO High Income Fund (NYSE: PHK) is down over 4% mid-Monday at $11.95, and that is listed on the PIMCO site as a 40% premium based on Friday data.  It just went ex-dividend for its $0.121875 payout just last on December 9.  On an adjusted close basis, the December high close was actually $13.14 just on December 7, for a standout drop of just under 10% (9.95%).  Its 52-week range is $8.81 (from flash crash) and adjusted from roughly $10.95 to $13.73 in the last year and the current dividend yield is listed as roughly 12.2%.

The iShares iBoxx High Yield Corporate Bond (NYSE: HYG) is flat on the day at $89.39 is much higher priced and based on the iBoxx $ Liquid High Yield index.  This one peaked just above $91.090 in early November and its last ex-date trade was December 1 with a $0.588 dividend.

The SPDR Barclays Capital High Yield Bond (NYSE: JNK) is down only $0.01 mid-Monday at $39.95 and December 1 was its ex-date trade for its $0.279 dividend.  It has barely traded above $40.00 throughout December and has held up much better than its peers.

It is pretty evident that the two more active ETF/ETN products are holding up better than the closed-end fund segments.  With more fluctuation between premium and discount to net asset values, closed-end funds often react more based upon buying demand versus seller supply of shares rather than the value of the underlying index comparisons.  We’ll be looking here to see if the closed-end funds have reached levels interesting enough to consider.

JON C. OGG

Morningstar’s John Gabriel noted, “Investors plowed some $19.7 billion into ETFs in March. Those inflows helped push total net inflows for the ETF industry to $7.7 billion for the first quarter of 2010.”

Read Full Article

Imagine the rate which companies of lower credit have to issue debtat to attract investors today.  Now throw in outflows from fundmanagers who manage junk bond funds only adding to the lack of liquidity.AMG recently noted more than $470 million flowed out of junk bond fundsa week ago and said some $590 million was the latest week’s outflowsfrom junk bond funds.  That is the equivalent of losing the assets ofseveral entire closed-end bond fund per week.

A week ago we saw a report from Moody’s showing that the junkdefault rate would rise sharply to 4.2% by the end of 2008.  It alsosaid default rates could jump to a sharp 7.9% one year out.  Moody’ssaid that September’s default rate of 2.8% was the highest in fouryears and double the rate of a year ago. Now S&P has put junkdefault rates at even higher levels.  By September 2009 it seesdefaults reaching 7.6% and under its pessimistic scenario it noteddefault rates running possibly as high as 9.6%.

Reliant recently paid 14% for its capital depending upon yourcalculation.  To make matters worse, many junk rated companies have tostart issuing debt again next year.  If the credit markets stay verysoft along with highly volatile markets and a weakening economy withrecession numbers just hitting the tape, then many junk bond holdersare going to find themselves asking how much more risk they are willingto take on.  Wait until defaults actually do start to post seriousgains and see how investors will treat the junk bond field.

Some of the closed-end funds and ETN’s below will spell out some ofthe carnage we are seeing as a result of recent volatility and creditmarket malaise:

The PIMCO High Income Fund (NYSE: PHK) closed down almost 3% Fridayat $7.04.  This is down 50% from its 52-week high of $14.10, and theyield is now over the whopping 20% mark.   

The Western Asset High Income Fund II Inc. (NYSE: HIX) closed upover 2% at $5.88 today and it too has nearly lost half of the valuefrom its 52-week highs.  Its yield is roughly 18% at the currentdividend rates.

The BlackRock Corporate High Yield Fund V, Inc. (NYSE: HYV) closedup 4% Friday at $6.94 and it has also lost close to half its value overthe last year and now yields roughly 18% at current payout rates.

For an ETN, the iShares iBoxx $ High Yield Corporate Bd (AMEX: HYG)has lost more than 30% of its value from highs of the last year and itsdividend at current rates is north of 10% if those payouts are steady.

For another ETN, the SPDR Lehman High Yield Bond (NYSE: JNK) haslost close to one-third of its value and after a near-6% drop Thursdayand another 1% Friday its yield is over 12% at current payout rates.

At some point these will become almost too cheap to ignore. Junkbonds are at spreads and levels that have never been seen in most ofour careers. But the other issue is that investors have been fleeingthe sector relentlessly and we are formally just entering the recessionnow.  Wait until investors actually start reading about all the junkquality bond defaults reaching levels that haven’t been seen since the1980′s since before a zany man named Michael Milken entered the stage.

Closed-end bond funds used to trade at high premiums to their net asset values, but now most trade at substantial discounts. Tight credit markets have always unlocked before. Bad times do always pass.  In the end, there will have been one great opportunity to buy these funds at a major discount.  Whether that time is now or in 2009 is still an unfinished chapter. 

Jon C. Ogg
October 18, 2008