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Breaking Bad, the Junk Bond Edition

Junk bonds, better known as high-yeild debt have seen much better days and strategists say that investors may be focusing too much on the role energy has played in the decline while underestimating other risks.

According to Matthew Mish, global credit strategist at UBS “Energy, bond valuations are pricing in an uplift in underlying commodities, so there’s more downside risk if prices hold at these levels for a long time or go lower,” And elsewhere, he added, “we do not see a marginal buyer for lower-quality credit.”

David Kotok, chairman and chief executive of Cumberland Advisors, worries more about the currency risk. “Foreign currencies — even those in developed markets such as Canada — have been crushed under a strong United States dollar. Over the past year, the Canadian loonie has fallen 17 percent against the American currency; the Brazilian real has plummeted 34 percent”, says Kotok.

Joseph F. Kalish, chief global macro strategist at Ned Davis Research concern is for the market damage seems to be spreading beyond commodities. Kalish says, “That’s what has gotten me more concerned this time around, compared to the generalized, risk-off sell-off we had in the middle of last year,”.

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