Junk Bonds to Lose 1.5 Percentage-Point QE Cushion, Fridson Says

October 24, 2013 Leave a comment

Junk Bonds to Lose 1.5 Percentage-Point QE Cushion, Fridson Says

Investors in junk bonds will lose a yield cushion of more than 1.5 percentage points as the Federal Reserve winds down its unprecedented quantitative easing program that’s bolstered credit markets for five years, according to Martin Fridson. “Tapering has been delayed, but high-yield investors should nevertheless assume that the end of quantitative easing will eventually hurt their returns,” Fridson, chief executive officer of New York-based FridsonVision LLC, a research firm specializing in speculative-grade debt, wrote in a report yesterday.The central bank said in November 2008 it would buy bonds to ease credit conditions and in September 2012 began the third-round of asset purchases, now totaling $85 billion a month of Treasury and government-agency mortgage-backed securities, to aid economic growth and reduce unemployment. While economists surveyed by Bloomberg had expected it to begin to reduce the program, known as quantitative easing, in mid-September, concern that job-market conditions weren’t improving stayed the Fed’s hand.

Once quantitative easing ends, “the rise in long-term Treasury rates that will almost certainly result will adversely affect the total return of high-yield bonds,” Fridson wrote.

Yield Projections

Fridson’s analysis is based on economic forecasts from William Cheney of Manulife Asset Management, whose projections were closest to perfect for gross domestic product and the consumer price index from December 2011 before the latest round of quantitative easing, according to an analysis of economists surveyed by Bloomberg. Cheney’s a good guide, Fridson wrote, because the projection “of a forecaster who hits GDP and CPI on the head is a reasonably reliable indication of what the rate will be if the Fed does not change the game by instituting quantitative easing.”

Cheney forecast the 10-year note would reach 3.4 percent by the end of 2012, about 1.64 percentage points above where it finished the year, which indicates how much QE suppressed interest rates, according to Fridson, who started his career as a corporate debt trader in 1976. That means yields now without QE would be about 4.25 percent, he said.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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