7% Yield on High Yield Corporate > EM Debt

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watchnerd
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7% Yield on High Yield Corporate > EM Debt

Post by watchnerd » Tue Mar 24, 2020 1:32 pm

VWEAX is showing a 30 Day SEC yield of 7%.

https://investor.vanguard.com/mutual-fu ... file/VWEAX

This is higher than the 5.37% for USD-denominated Emerging Market government debt:

https://investor.vanguard.com/mutual-fu ... file/vgavx

I find it incredibly interesting the the market is rating us corporate junk as riskier than emerging market government debt.

Top 5 holdings of each:

BOA-MTG TRIPARTY REPO
Sprint Corp.
CRC Escrow Issuer LLC / CRC Finco Inc.
TD TRIPARTY MORTGAGE
RBC TRIPARTY MTGE

vs

Qatar Government International Bond
Petroleos Mexicanos
Kingdom of Saudi Arabia
State of Qatar
Petroleos Mexicanos

Or, more specifically, US mortgage backed debt vs foreign governments.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Tue Mar 24, 2020 2:38 pm

watchnerd wrote:
Tue Mar 24, 2020 1:32 pm
VWEAX is showing a 30 Day SEC yield of 7%.

https://investor.vanguard.com/mutual-fu ... file/VWEAX

This is higher than the 5.37% for USD-denominated Emerging Market government debt:

https://investor.vanguard.com/mutual-fu ... file/vgavx

I find it incredibly interesting the the market is rating us corporate junk as riskier than emerging market government debt.

Top 5 holdings of each:

BOA-MTG TRIPARTY REPO
Sprint Corp.
CRC Escrow Issuer LLC / CRC Finco Inc.
TD TRIPARTY MORTGAGE
RBC TRIPARTY MTGE

vs

Qatar Government International Bond
Petroleos Mexicanos
Kingdom of Saudi Arabia
State of Qatar
Petroleos Mexicanos

Or, more specifically, US mortgage backed debt vs foreign governments.
You probably not getting many comments because most BHers would not deign to hold these funds.

I actually own both and have watched the yields on these two funds for years.

At the end of the day, those governments can guarantee repayment in various ways but the companies issuing junk bonds, outside of a new Fed mandate, are left to their own devices, so does it not seem that the non-investment grade corporates should command a larger credit spread?

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by watchnerd » Tue Mar 24, 2020 2:41 pm

restingonmylaurels wrote:
Tue Mar 24, 2020 2:38 pm

You probably not getting many comments because most BHers would not deign to hold these funds.

I actually own both and have watched the yields on these two funds for years.

At the end of the day, those governments can guarantee repayment in various ways but the companies issuing junk bonds, outside of a new Fed mandate, are left to their own devices, so does it not seem that the non-investment grade corporates should command a larger credit spread?
Oh, it's rational.

I think it's just fascinating how much this has shifted in the last 30-60 days.

Junk wasn't yielding higher than EM debt a few months ago.
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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Tue Mar 24, 2020 2:59 pm

watchnerd wrote:
Tue Mar 24, 2020 2:41 pm
restingonmylaurels wrote:
Tue Mar 24, 2020 2:38 pm

You probably not getting many comments because most BHers would not deign to hold these funds.

I actually own both and have watched the yields on these two funds for years.

At the end of the day, those governments can guarantee repayment in various ways but the companies issuing junk bonds, outside of a new Fed mandate, are left to their own devices, so does it not seem that the non-investment grade corporates should command a larger credit spread?
Oh, it's rational.

I think it's just fascinating how much this has shifted in the last 30-60 days.

Junk wasn't yielding higher than EM debt a few months ago.
Yes, you are right, much has gone upside down in recent months.

BTW, I hope things are not going too bad in Seattle these days. I know it well.
Last edited by restingonmylaurels on Tue Mar 24, 2020 3:21 pm, edited 1 time in total.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by Kenkat » Tue Mar 24, 2020 3:03 pm

Luckily, if the economy recovers some and people start feeling better about things, we can look forward to posters asking if it’s a good time to buy high yield bond funds because look at that great yield.

Full disclosure, 10% of my bond allocation is in high yield bonds. It was 15% last month! BaBop! I’m here all week folks... :wink:

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by watchnerd » Tue Mar 24, 2020 3:06 pm

Kenkat wrote:
Tue Mar 24, 2020 3:03 pm
Luckily, if the economy recovers some and people start feeling better about things, we can look forward to posters asking if it’s a good time to buy high yield bond funds because look at that great yield.

Full disclosure, 10% of my bond allocation is in high yield bonds. It was 15% last month! BaBop! I’m here all week folks... :wink:
BADA BING!

At these prices, I'm almost tempted to violate my IPS.
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Re: 7% Yield on High Yield Corporate > EM Debt

Post by mptfan » Tue Mar 24, 2020 3:06 pm

restingonmylaurels wrote:
Tue Mar 24, 2020 2:38 pm
You probably not getting many comments because most BHers would not deign to hold these funds.
That's not true, I think VWEAX is a good fund and I hold high yield bonds.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Tue Mar 24, 2020 3:17 pm

Kenkat wrote:
Tue Mar 24, 2020 3:03 pm
Luckily, if the economy recovers some and people start feeling better about things, we can look forward to posters asking if it’s a good time to buy high yield bond funds because look at that great yield.

Full disclosure, 10% of my bond allocation is in high yield bonds. It was 15% last month! BaBop! I’m here all week folks... :wink:
I am not sure I can calculate it easily with all of recent gyrations, but before this recent trauma, it was probably about 10% of my bond allocation.

That was before I hived off a further 10% (it was 20%) to put it into emerging markets bonds!!

Both will be much higher after today's market action (and down again probably tomorrow and the day after that).

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Tue Mar 24, 2020 3:19 pm

mptfan wrote:
Tue Mar 24, 2020 3:06 pm
restingonmylaurels wrote:
Tue Mar 24, 2020 2:38 pm
You probably not getting many comments because most BHers would not deign to hold these funds.
That's not true, I think VWEAX is a good fund and I hold high yield bonds.
That is great to hear, I thought I was the only one, now I find there are at least three of us.

If I hear one more time that bonds are only for safety..... :happy

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by nullisland » Tue Mar 24, 2020 3:20 pm

watchnerd wrote:
Tue Mar 24, 2020 1:32 pm
Top 5 holdings of each:

BOA-MTG TRIPARTY REPO
Sprint Corp.
CRC Escrow Issuer LLC / CRC Finco Inc.
TD TRIPARTY MORTGAGE
RBC TRIPARTY MTGE

vs

Qatar Government International Bond
Petroleos Mexicanos
Kingdom of Saudi Arabia
State of Qatar
Petroleos Mexicanos

Or, more specifically, US mortgage backed debt vs foreign governments.
The top holdings of the high-yield fund are a little misleading, those are repurchase agreements collateralized by mortgage-backed securities. They're short-term cash investments and work sort of like a money-market fund. The individual repo agreements are larger than most of their other individual bond holdings, but in aggregate the repo agreements are only about 5% of the fund's holdings, and since they're collateralized loans they're probably the least risky component (aside from the small number of Treasuries they also hold). The regular corporate bonds drive the vast majority of both the risk and return of this fund.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by watchnerd » Tue Mar 24, 2020 3:30 pm

nullisland wrote:
Tue Mar 24, 2020 3:20 pm
watchnerd wrote:
Tue Mar 24, 2020 1:32 pm
Top 5 holdings of each:

BOA-MTG TRIPARTY REPO
Sprint Corp.
CRC Escrow Issuer LLC / CRC Finco Inc.
TD TRIPARTY MORTGAGE
RBC TRIPARTY MTGE

vs

Qatar Government International Bond
Petroleos Mexicanos
Kingdom of Saudi Arabia
State of Qatar
Petroleos Mexicanos

Or, more specifically, US mortgage backed debt vs foreign governments.
The top holdings of the high-yield fund are a little misleading, those are repurchase agreements collateralized by mortgage-backed securities. They're short-term cash investments and work sort of like a money-market fund. The individual repo agreements are larger than most of their other individual bond holdings, but in aggregate the repo agreements are only about 5% of the fund's holdings, and since they're collateralized loans they're probably the least risky component (aside from the small number of Treasuries they also hold). The regular corporate bonds drive the vast majority of both the risk and return of this fund.
So is that a buy recommendation?
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informal guide
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Re: 7% Yield on High Yield Corporate > EM Debt

Post by informal guide » Tue Mar 24, 2020 4:17 pm

Another popular High yield fund is FAGIX, Fidelity Capital & Income, with over $12 billion in fund assets. It has been around for decades, with a unique feature that serves it well in good times, but..... Its assets consist, as of 2/28/2020, of 20.7% equities; 14.8% of bond assets are rated CCC and below, as of 1/31/20. As of year-end 2019, 34% of the equity portfolio was in information technology.

The "but" refers to when markets decline. YTD through yesterday returns were -26.93%; certainly not ballast against a declining equity market! It currently has a SEC 30 day yield of 5.39%, dragged down by the zero to very low yielding equities in the portfolio

My belief is that many have bought it because, over good periods and long periods of time, it outperforms other high yield bond funds (who don't have a 20% equity allocation). Caveat emptor!

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by nullisland » Tue Mar 24, 2020 4:18 pm

watchnerd wrote:
Tue Mar 24, 2020 3:30 pm
So is that a buy recommendation?
lol. Not investment advice. For what it's worth I do not own any high-yield corporate bonds. I do not expect to purchase any. I do find the high-yield spread an interesting economic data point.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by watchnerd » Tue Mar 24, 2020 4:19 pm

informal guide wrote:
Tue Mar 24, 2020 4:17 pm
certainly not ballast against a declining equity market! It currently has a SEC 30 day yield of 5.39%,
Well, yeah...but hopefully nobody buys junk expecting them to act like Treasuries.
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Re: 7% Yield on High Yield Corporate > EM Debt

Post by alpenglow » Tue Mar 24, 2020 7:59 pm

The high yield option adjusted spread right now is almost 11%, which is a recent high. FWIW, it spiked to almost 20% in 2008.

https://fred.stlouisfed.org/series/BAMLH0A0HYM2

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by watchnerd » Tue Mar 24, 2020 8:08 pm

alpenglow wrote:
Tue Mar 24, 2020 7:59 pm
The high yield option adjusted spread right now is almost 11%, which is a recent high. FWIW, it spiked to almost 20% in 2008.

https://fred.stlouisfed.org/series/BAMLH0A0HYM2
Dang
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Re: 7% Yield on High Yield Corporate > EM Debt

Post by desafinado » Tue Mar 24, 2020 8:13 pm

with the new fed actions aren't corporates basically just equities with a fed bid?

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by shm317 » Tue Mar 24, 2020 8:14 pm

I cover high yield for a living. As was the case in 2008, the market is (temporarily) broken. In these situations, trading liquidity literally disappears. Funds are forced to sell bonds to fund redemptions but there are no buyers on the other side. The bid/ask spread become insane. 5, 10, 15 points. Funds end up selling the shortest dated highest quality stuff they can because that’s the only place they can get liquidity. Which is why some front end bonds are climbing to ridiculous yields right now.

For brave and greedy buyers you can make a lot of money in high yield in these markets, just taking advantage of the lack of liquidity.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by watchnerd » Tue Mar 24, 2020 8:15 pm

desafinado wrote:
Tue Mar 24, 2020 8:13 pm
with the new fed actions aren't corporates basically just equities with a fed bid?
I don't interpret the Fed as a new TARP for corp bonds (yet).

Liquidity and market making by the Fed is filling the gap banks used to play before Dodd-Frank.
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Re: 7% Yield on High Yield Corporate > EM Debt

Post by Dale_G » Tue Mar 24, 2020 11:15 pm

I hold 25% of my bonds in Vanguard's high Yield (VWEAX) and Emerging Markets (VEGBX) in equal amounts. I only go back with the EM bonds about 6 years, but have held junk most of the time for 30 years. I also hold long treasuries and I rebalance the bond funds as the occasion demands. The last good opportunity was was in 2008/2009. I remember adding a good chunk at $4.03/shr. The low was $3.90 on 12/05/2008.

We'll see where it gets to this time.

I don't need bonds for safety and I don't recommend junk to others. It takes a certain kind of perverse nature.

Dale
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Re: 7% Yield on High Yield Corporate > EM Debt

Post by watchnerd » Tue Mar 24, 2020 11:50 pm

Dale_G wrote:
Tue Mar 24, 2020 11:15 pm
I hold 25% of my bonds in Vanguard's high Yield (VWEAX) and Emerging Markets (VEGBX) in equal amounts. I only go back with the EM bonds about 6 years, but have held junk most of the time for 30 years. I also hold long treasuries and I rebalance the bond funds as the occasion demands. The last good opportunity was was in 2008/2009. I remember adding a good chunk at $4.03/shr. The low was $3.90 on 12/05/2008.

We'll see where it gets to this time.

I don't need bonds for safety and I don't recommend junk to others. It takes a certain kind of perverse nature.

Dale
What do you think of local currency EM debt?

LEMB (ETF) looks kind of interesting, but it's heavy on Brazil.

USD debt seems to hold less sketchy countries, but then you're faced with the dilemma of defaults vs devaluation.
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Re: 7% Yield on High Yield Corporate > EM Debt

Post by littlebird » Wed Mar 25, 2020 12:03 am

mptfan wrote:
Tue Mar 24, 2020 3:06 pm
restingonmylaurels wrote:
Tue Mar 24, 2020 2:38 pm
You probably not getting many comments because most BHers would not deign to hold these funds.
That's not true, I think VWEAX is a good fund and I hold high yield bonds.
Me too. I’ve been satisfied with it for years and still hold it.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by Dale_G » Wed Mar 25, 2020 12:21 am

What do you think of local currency EM debt?
If Vanguard offered a local currency bond fund, I would probably own some. But I think I already have plenty of currency risk with International equities :happy

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Wed Mar 25, 2020 3:03 am

I believe the count is now 5 BHers admitting to be longer-term holders of HYC.

The SEC yield as of yesterday's close is now 7.58%. Treasuries of similar duration are 0.44%. Hard to resist the urge to add at that delta.

BTW, although the focus of the junk market now is on potential/actual default, I would think that the junk market's quality will actually improve, with all of the downgraded BBBs that will soon move into this category.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Wed Mar 25, 2020 6:16 am

restingonmylaurels wrote:
Wed Mar 25, 2020 3:03 am
The SEC yield as of yesterday's close is now 7.58%. Treasuries of similar duration are 0.44%. Hard to resist the urge to add at that delta..
The credit spread is then what, at least 714 basis points.

Per S&P, https://www.cnbc.com/2020/03/20/junk-bo ... -says.html, the junk bond default rate could go from 3.1% to 10% over the next 12 months.

VG's high yield corporate fund (VWEAX) historically has a default rate about half that, 1.5%.

Then using S&P's estimate, VWEAX's default rate would go to around 5% over the next 12 months.

If this is viewed over 6 years time (twice the fund's duration) and defaults are assumed to fall in half the second year and revert to a normal range in the third year, the excess pre-tax earnings from buying HYC now would be:

(6 years * 7.14%) - (1 year * 5%) - (1 year * 2.5%) - (4 years * 1.5%) = 42.84% - 13.5% = 29.34% or 4.89% per year

Does the math work out?

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by sperry8 » Wed Mar 25, 2020 1:53 pm

restingonmylaurels wrote:
Wed Mar 25, 2020 3:03 am
I believe the count is now 5 BHers admitting to be longer-term holders of HYC.

The SEC yield as of yesterday's close is now 7.58%. Treasuries of similar duration are 0.44%. Hard to resist the urge to add at that delta.

BTW, although the focus of the junk market now is on potential/actual default, I would think that the junk market's quality will actually improve, with all of the downgraded BBBs that will soon move into this category.
Agreed, that is a heck of a spread. Not sure if defaults are priced in... but with gov't backstops perhaps there will be less defaults than feared?
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Re: 7% Yield on High Yield Corporate > EM Debt

Post by alex_686 » Wed Mar 25, 2020 1:58 pm

sperry8 wrote:
Wed Mar 25, 2020 1:53 pm
Agreed, that is a heck of a spread. Not sure if defaults are priced in... but with gov't backstops perhaps there will be less defaults than feared?
The yield either has to be coming from credit spreads (default risk) or from liquidity. The CDX HY 5 year index, which is a hedge against high yield defaults, is current at 723 bps or 7.23%, so I am going to guess that most of it is coming from the credit spread.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by madbrain » Wed Mar 25, 2020 7:34 pm

restingonmylaurels wrote:
Wed Mar 25, 2020 3:03 am
I believe the count is now 5 BHers admitting to be longer-term holders of HYC.

The SEC yield as of yesterday's close is now 7.58%. Treasuries of similar duration are 0.44%. Hard to resist the urge to add at that delta.

BTW, although the focus of the junk market now is on potential/actual default, I would think that the junk market's quality will actually improve, with all of the downgraded BBBs that will soon move into this category.
I still own about $75k of high-yield in Roth IRA. VWEHX and SPHIX . They sure have taken a tumble this year between the fed rate cuts and recession prospects. I'm not selling.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Thu Mar 26, 2020 5:05 am

madbrain wrote:
Wed Mar 25, 2020 7:34 pm
restingonmylaurels wrote:
Wed Mar 25, 2020 3:03 am
The SEC yield as of yesterday's close is now 7.58%. Treasuries of similar duration are 0.44%. Hard to resist the urge to add at that delta.
I still own about $75k of high-yield in Roth IRA. VWEHX and SPHIX . They sure have taken a tumble this year between the fed rate cuts and recession prospects. I'm not selling.
At yesterday's close, the SEC yield for VWEAX is now 7.96%!!!

Similar duration Treasury is 0.41%, for an excess yield of 7.55%!!

Will shortly be adding more monies to my VWEAX fund.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by madbrain » Thu Mar 26, 2020 5:25 am

restingonmylaurels wrote:
Thu Mar 26, 2020 5:05 am
Similar duration Treasury is 0.41%, for an excess yield of 7.55%!!

Will shortly be adding more monies to my VWEAX fund.
I would be careful with that, with the recession we are already in, which is going to crush a lot of businesses. I believe we are far from having hit the bottom. I'm holding on, but not ready to add to mine yet.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Thu Mar 26, 2020 5:53 am

madbrain wrote:
Thu Mar 26, 2020 5:25 am
restingonmylaurels wrote:
Thu Mar 26, 2020 5:05 am
Similar duration Treasury is 0.41%, for an excess yield of 7.55%!!

Will shortly be adding more monies to my VWEAX fund.
I would be careful with that, with the recession we are already in, which is going to crush a lot of businesses. I believe we are far from having hit the bottom. I'm holding on, but not ready to add to mine yet.
Yes, I concur with that. By shortly I meant I will look at this funding over the next several weeks, waiting for other possible bad news.

Thinking back to 2008/09, I think VWEAX hit its bottom in December 2008, while stocks hit theirs in March 2009.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by grayfox » Thu Mar 26, 2020 6:35 am

watchnerd wrote:
Tue Mar 24, 2020 1:32 pm
VWEAX is showing a 30 Day SEC yield of 7%.

https://investor.vanguard.com/mutual-fu ... file/VWEAX
How risky is Vanguard High-Yield Corporate Fund Admiral Shares (VWEAX)?

It was 6.00 on 2/19/2020 before the crisis and now it is 4.95, so down -17.5%.
Compare to S&P500 which is now down about -23.38% since 2/19. So less drawdown than S&P500.
Meanwhile IT Investment Grade VCIT is down -7.7%. So defintely worse than investment grade bonds.

Look at how this fund has done in past recessions. I would look at VWEHX because it has a longer history going back to 1980. VWEAX only goes back to 2002

Also, I would subtract off at least 2% from the SEC Yield for possible defaults. Maybe subtract 3% to be safe. Right now SEC yield is showing 7.96% So the expected return is more like 5 or 6 percent, which is not too shabby.

If the SEC Yield gets to 10%, this would look pretty good. I would only buy these things when they are beaten way down.

BTW: Back in 2014 I looked at how well SEC predicted 5-year return for VWEHX from Jan-1994 to Dec-2013. I found that SEC was a biased estimator. The mean return predicted by SEC was 0.0792 while the actual mean return was 0.06. So the mean prediction was biased +1.92% high. That is why I would subtract about 2% on average from SEC Yield to predict the return.
Last edited by grayfox on Thu Mar 26, 2020 7:22 am, edited 1 time in total.
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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Thu Mar 26, 2020 7:22 am

grayfox wrote:
Thu Mar 26, 2020 6:35 am
watchnerd wrote:
Tue Mar 24, 2020 1:32 pm
VWEAX is showing a 30 Day SEC yield of 7%.

https://investor.vanguard.com/mutual-fu ... file/VWEAX
This was 6.00 on 2/19/2020 before the crisis and now it is 4.95, so down -17.5%.
Compare to S&P500 which is now down about -23.38% since 2/19. So less drawdown than S&P500.
Meanwhile IT Investment Grade VCIT is down -7.7%. So defintely worse than investment grade bonds.

Look at how this fund has done in past recessions. I would look at VWEHX because it has a longer history going back to 1980. VWEAX only goes back to 2002

Also, I would subtract off at least 2% from the SEC Yield for possible defaults. Maybe subtract 3% to be safe. Right now SEC yield is showing 7.96% So the expected return is more like 5 or 6 percent, which is not too shabby.

If the SEC Yield gets to 10%, this would look pretty good. I would only buy these things when they are beaten way down.
Going back to 1985 on PV, VWEHX has a CAGR of 7.78%. I assume that is inclusive of default losses.

In a post above, I had tried to calculate the excess return (above similar duration Treasuries) of VWEAX, net of expected losses.

I remember that this fund has a historical average of about 1.5% loss to defaults. Given its safer junk philosophy, I assume that it could lose 5% this year (based on market expectations of a 10% default rate in all junk bonds), 2.5% next year and then return to 1.5% per year after that.

Even with those losses, this SEC yield is pretty compelling and I wonder how much longer this bargain will be available.

Given the forward looking nature of the markets, anywhere from 1 day to 3 weeks I would guess. Just need that other foot to fall first.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by sperry8 » Fri Mar 27, 2020 1:38 pm

GMO came out with a white paper today touting buying HY. Said the bottom may not be in, but for someone willing to hold medium to long term should be happy. Perhaps they are early - but sometimes these things have a way of being deals for only a short window.

https://www.advisorperspectives.com/com ... -in-credit
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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Fri Mar 27, 2020 2:20 pm

sperry8 wrote:
Fri Mar 27, 2020 1:38 pm
GMO came out with a white paper today touting buying HY. Said the bottom may not be in, but for someone willing to hold medium to long term should be happy. Perhaps they are early - but sometimes these things have a way of being deals for only a short window.

https://www.advisorperspectives.com/com ... -in-credit
The key issue here is the significant credit spread versus the extent of the upcoming losses. I like their analysis of those potential losses.

I am assuming that VG's HYC might lose half of that due to its focus on higher rated junk but that is mere speculation.

As the white paper states:
While this would suggest an attractive entry point, we must also consider the potential downsides and that asset prices might sell off further:

- The current high yield spread of 1,000 bps compares to ultimate wides of over 1,100 bps in 2002 and 2,000 in 2008.6
- High yield drawdown was 33% from June through November of 2008.7
So I am watching this closely over the next few weeks. As I write this, HYG is up 0.68% on the day while the SP&P 500 is down 1.52%.

This would seem to imply that there is some sentiment that this space may be firming.

HYC's SEC yield was still 7.88% (down 0.10%) even though the fund gained more than 3% yesterday. Huh?

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by sperry8 » Fri Mar 27, 2020 4:18 pm

The drawdown was 33%... but HYG has already had a sig drawdown... how much is left is the real question. It won't be 33% from here
BH contest results: 2019: #233 of 645 | 18: #150 of 493 | 17: #516 of 647 | 16: #121 of 610 | 15: #18 of 552 | 14: #225 of 503 | 13: #383 of 433 | 12: #366 of 410 | 11: #113 of 369 | 10: #53 of 282

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by watchnerd » Fri Mar 27, 2020 4:20 pm

sperry8 wrote:
Fri Mar 27, 2020 1:38 pm
GMO came out with a white paper today touting buying HY. Said the bottom may not be in, but for someone willing to hold medium to long term should be happy. Perhaps they are early - but sometimes these things have a way of being deals for only a short window.

https://www.advisorperspectives.com/com ... -in-credit
Okay, what's with all the Lil Nas references in that article? WTH?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by dcop » Fri Mar 27, 2020 6:10 pm

I own both VWEAX and VWETX. The NAVs has been volatile during the CV but I'm hoping the monthly payout ($$ not percentage) doesn't bungee jump. I've only owned them for four years so this is my first time through a economy crisis with them.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by Elysium » Fri Mar 27, 2020 6:16 pm

High Yield Bonds are really a hybrid, between equity and bonds, and as such regardless of the spread they cannot be used as a Bond equivalent. That leaves with the choice of using the Equity side of the allocation to buy High Yields. In times like this the question is where is more value, in buying more Equities that are getting beaten down, or buying High Yields that are also getting beaten down.

We have to really look at total returns, not the yield, when the market recovers which one will have better overall returns, most likely equities. If we use bond money to purchase High Yield then we are increasing the risk in portfolio which no one wants to do now. If we do from the equity side there is an opportunity cost involved.

May be a good option for those who cannot bring themselves up to buy more equities now, to buy some High Yield instead. But make sure it comes out of equity side. Personally I would skip, since I do not have space in my portfolio for too many things, and it really complicates things to hold hybrid assets.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Sat Mar 28, 2020 4:48 am

Elysium wrote:
Fri Mar 27, 2020 6:16 pm
High Yield Bonds are really a hybrid, between equity and bonds, and as such regardless of the spread they cannot be used as a Bond equivalent. That leaves with the choice of using the Equity side of the allocation to buy High Yields. In times like this the question is where is more value, in buying more Equities that are getting beaten down, or buying High Yields that are also getting beaten down.

We have to really look at total returns, not the yield, when the market recovers which one will have better overall returns, most likely equities. If we use bond money to purchase High Yield then we are increasing the risk in portfolio which no one wants to do now. If we do from the equity side there is an opportunity cost involved.

May be a good option for those who cannot bring themselves up to buy more equities now, to buy some High Yield instead. But make sure it comes out of equity side. Personally I would skip, since I do not have space in my portfolio for too many things, and it really complicates things to hold hybrid assets.
To be clear, high-yield bonds are legally corporate bonds just like any other.

What you are referring to is the fact that their return and volatility have components of both equity and fixed income.

I believe you are not considering the liability matching problem of retired investors but I know others have a different approaches to that.

VG published ”Junk or jewel? Assessing the role of high-yield bonds in a diversified portfolio,” 9 months ago in mid 2019.

Some of this white paper’s points.
We conclude that high-yield bonds are expected to improve the risk and return characteristics of a traditional balanced portfolio.
This assumed equity side funding.
The diversification benefit they offer, thanks to their imperfect correlation with other fixed income sectors.
One of several benefits.
efficient frontiers… show that portfolios that include high-yield bonds are expected to have higher risk-adjusted returns than those without.
Using the last 35 years of market data.
Investors who include high yield in a 60/40 portfolio should get a higher level of return for the same level of risk, and a lower level of risk for the same level of return, as they would with a 60/40 portfolio that does not include high yield.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by BJJ_GUY » Sat Mar 28, 2020 5:21 am

Elysium wrote:
Fri Mar 27, 2020 6:16 pm
High Yield Bonds are really a hybrid, between equity and bonds, and as such regardless of the spread they cannot be used as a Bond equivalent. That leaves with the choice of using the Equity side of the allocation to buy High Yields. In times like this the question is where is more value, in buying more Equities that are getting beaten down, or buying High Yields that are also getting beaten down.

We have to really look at total returns, not the yield, when the market recovers which one will have better overall returns, most likely equities. If we use bond money to purchase High Yield then we are increasing the risk in portfolio which no one wants to do now. If we do from the equity side there is an opportunity cost involved.

May be a good option for those who cannot bring themselves up to buy more equities now, to buy some High Yield instead. But make sure it comes out of equity side. Personally I would skip, since I do not have space in my portfolio for too many things, and it really complicates things to hold hybrid assets.
Good points here.

It is a good idea, especially for the less trained investors in here, to think about HY exposure as a component of the equity portfolio. Sure, HY are technically bonds but low-grade unsecured debt tends to behave very similar to equities during market extremes (correlations tend to spike at when you're likely relying on the fixed income portfolio to be a ballast).

In my opinion, HY is not a good evergreen exposure for most portfolios. Mutual fund/ETF vehicles are sub-optimal for HY exposure, and more times than not the opportunity cost of owning HY at the expense of equity is too high. That said, there are times when HY becomes so oversold where a tactical allocation makes sense, especially since credit tends to snap back and lead equities into a new cycle. But this likely isn't everyone's cup of tea, so better off with stocks and actual (high quality) fixed income.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by grayfox » Sat Mar 28, 2020 6:35 am

Elysium wrote:
Fri Mar 27, 2020 6:16 pm
High Yield Bonds are really a hybrid, between equity and bonds, and as such regardless of the spread they cannot be used as a Bond equivalent. That leaves with the choice of using the Equity side of the allocation to buy High Yields. In times like this the question is where is more value, in buying more Equities that are getting beaten down, or buying High Yields that are also getting beaten down.

We have to really look at total returns, not the yield, when the market recovers which one will have better overall returns, most likely equities. If we use bond money to purchase High Yield then we are increasing the risk in portfolio which no one wants to do now. If we do from the equity side there is an opportunity cost involved.

May be a good option for those who cannot bring themselves up to buy more equities now, to buy some High Yield instead. But make sure it comes out of equity side. Personally I would skip, since I do not have space in my portfolio for too many things, and it really complicates things to hold hybrid assets.
I concur.

At this time, I will skip HY Bonds and am putting money to work in the stock market only. I think you get more bang for your buck.
Sic transit gloria mundi. [STGM]

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by alpenglow » Sat Mar 28, 2020 7:34 am

grayfox wrote:
Sat Mar 28, 2020 6:35 am
Elysium wrote:
Fri Mar 27, 2020 6:16 pm
High Yield Bonds are really a hybrid, between equity and bonds, and as such regardless of the spread they cannot be used as a Bond equivalent. That leaves with the choice of using the Equity side of the allocation to buy High Yields. In times like this the question is where is more value, in buying more Equities that are getting beaten down, or buying High Yields that are also getting beaten down.

We have to really look at total returns, not the yield, when the market recovers which one will have better overall returns, most likely equities. If we use bond money to purchase High Yield then we are increasing the risk in portfolio which no one wants to do now. If we do from the equity side there is an opportunity cost involved.

May be a good option for those who cannot bring themselves up to buy more equities now, to buy some High Yield instead. But make sure it comes out of equity side. Personally I would skip, since I do not have space in my portfolio for too many things, and it really complicates things to hold hybrid assets.
I concur.

At this time, I will skip HY Bonds and am putting money to work in the stock market only. I think you get more bang for your buck.
That was my thinking as well.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Sat Mar 28, 2020 8:59 am

grayfox wrote:
Sat Mar 28, 2020 6:35 am
I concur.

At this time, I will skip HY Bonds and am putting money to work in the stock market only. I think you get more bang for your buck.
If you are not relying on your portfolio to pay monthly expenses, you can afford to wait out stock market volatility.

Perhaps the reasons for differing approaches was best stated by VG in their whitepaper from over a dozen years ago,
the total-return approach to spending is identical to the income approach for investors whose portfolios generate enough cash flow to
meet their spending needs.

For those investors who need more cash flow than their portfolios yield, the total-return approach is the preferred method.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by Kenkat » Sat Mar 28, 2020 10:26 am

dcop wrote:
Fri Mar 27, 2020 6:10 pm
I own both VWEAX and VWETX. The NAVs has been volatile during the CV but I'm hoping the monthly payout ($$ not percentage) doesn't bungee jump. I've only owned them for four years so this is my first time through a economy crisis with them.
I would expect the monthly payout to stay roughly the same in terms of total dollars, so if you are reinvesting that back into the fund, you will be buying additional shares with what is a pretty attractive yield in my opinion. The threat would be that there are a larger number of defaults expected which would cut into the monthly payout amount over time.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by JackoC » Sat Mar 28, 2020 10:53 am

watchnerd wrote:
Tue Mar 24, 2020 11:50 pm
Dale_G wrote:
Tue Mar 24, 2020 11:15 pm
I hold 25% of my bonds in Vanguard's high Yield (VWEAX) and Emerging Markets (VEGBX) in equal amounts. I only go back with the EM bonds about 6 years, but have held junk most of the time for 30 years. I also hold long treasuries and I rebalance the bond funds as the occasion demands. The last good opportunity was was in 2008/2009. I remember adding a good chunk at $4.03/shr. The low was $3.90 on 12/05/2008.

We'll see where it gets to this time.
I don't need bonds for safety and I don't recommend junk to others. It takes a certain kind of perverse nature.
What do you think of local currency EM debt?

LEMB (ETF) looks kind of interesting, but it's heavy on Brazil.
I believe EM local debt is more of a diversifier of stock risk than either USD denominated EM debt or especially US corporate junk. Mainly on a fundamental basis, as opposed to presenting the very limited statistical history of EM local funds. It's just a pretty different thing, the fiscal situation of EM govts wrt their own currency debt and the value of their currencies in USD, v (the US) especially stock market. Obviously there's an overall 'market risk' factor by which all risk assets go down in value in a situation like recently: there's little hope for shelter from that in any risky asset. But over the longer run not a lot of reason IMO to think that equity, especially just US, has to perform in line with its history just about the same as EM local bonds perform relative to their history. Why would that be?

My preferred fund is EMLC. Most such funds have a lot of Brazil (slightly less than 10%, LEMB is slightly more), it's a big borrower in that sphere. Although this particular fund is going to add China over time which become biggest slice eventually (v 0.17% right now). My overall position is necessarily small because risky bonds of any kind don't work well in taxable and a small % of my portfolio is tax deferred (so 10% Brazil in a couple of % of portfolio is not a significant concentration, it wouldn't be unless EMLC were a pretty big % of portfolio which I wouldn't recommend). I assume EMLC comprises 2/3 the risk of equity $ for $ based on the 5 yr history of std dev of return relative to world stock, and its recent drop is more or less in line with that.

As others stated, market history showed many cases especially of lower % stock portfolios where VWEAX (US corp junk) improved the Sharpe Ratio over just stock/treasury. However that advantage I found (in own research rather than paper reference) tailed off at the high equity %'s often (at least up to now... :happy ) favored on this forum. And you do have to assess the relative risk: it's dangerous to assume it's a 1:1 treasury substitute, but it's sub optimal if safer to assume it's a 1:1 stock substitute which it's really not either. And it is a play on a more similar type of risk to US stock market risk than the risk in EM local bonds. I used to have a bit in US corporate junk before deciding EMLC was the better diversifier looking forward.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by celia » Sat Mar 28, 2020 11:15 am

I’ve owned it for a long time, ever since I read that the ‘junk bonds’ it holds are the better quality junk (although I’ve cut back on these in my Roth recently). The yield will go up when shares drop in value, which has been happening lately. (If a stock or bond loses half its value, the dividend or interest paid out is then twice the rate it previously was,)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by restingonmylaurels » Sat Mar 28, 2020 2:53 pm

celia wrote:
Sat Mar 28, 2020 11:15 am
I’ve owned it for a long time, ever since I read that the ‘junk bonds’ it holds are the better quality junk (although I’ve cut back on these in my Roth recently). The yield will go up when shares drop in value, which has been happening lately. (If a stock or bond loses half its value, the dividend or interest paid out is then twice the rate it previously was,)
Yes, and the yield will go up when the fund purchases new bonds at higher yields, which apparently has been happening this week.

See David Grabiner's comments in this other thread: viewtopic.php?f=10&t=309301

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restingonmylaurels and others

Post by KEotSK66 » Sun Mar 29, 2020 4:15 pm

hi

i saw this from a vg paper
the total-return approach to spending is identical to the income approach for investors whose portfolios generate enough cash flow to
meet their spending needs.

For those investors who need more cash flow than their portfolios yield, the total-return approach is the preferred method.
could someone explain these statements ? something doesn't seem right to me, can't find the right adjective

thanks

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Re: 7% Yield on High Yield Corporate > EM Debt

Post by SimpleGift » Sun Mar 29, 2020 5:37 pm

KEotSK66 wrote:
Sun Mar 29, 2020 4:15 pm
i saw this from a vg paper
the total-return approach to spending is identical to the income approach for investors whose portfolios generate enough cash flow to meet their spending needs.

For those investors who need more cash flow than their portfolios yield, the total-return approach is the preferred method.
could someone explain these statements ?
Vanguard seems to be saying, if one has a broadly-diversified portfolio that generates say 2% in annual income — and one's annual portfolio withdrawals are 2% or less — then one can "live off the income" without touching the growth of the portfolio or one's original investment.

But if an investor with the same portfolio needs 4% in annual withdrawals, then instead of changing to riskier income assets to try to generate 4% in portfolio income, it's better to stick with the broadly-diversified portfolio and use the total return approach, which relies on both income and the periodic sale of (hopefully appreciating) assets to generate the 4% withdrawals.

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