Picerno (and RH) on High Yield

James Picerno has a blog post out on Is It Time To Start Taking Profits In Junk Bonds? and I think his conclusions are correct, conclusions which can be summed up by his final comment:

...the good times may roll on for the high-yield market. But for anyone who respects probabilities, the odds don’t look especially favorable. After all, the problem with holding assets that are priced for perfection is that we live (and invest) in an imperfect world.

On the other hand the discussion of high yield reminded me of two things:


1. High yield has been a very effective vehicle for me in trend following in fixed income.  This is because (a) it, in it's etf form, has more beta than typical fixed income funds and so it tends to respect trend thresholds better than some other fund types, and (b) it pays me so that if I trade to breakeven, which I can, I still get paid.  That's a pretty good deal for a systematic approach where the big drawdowns are by definition mostly avoided. So, while James advice is sound, it may not apply in a systematic alt risk approach.

and

2. I was reminded that the single biggest trade by any metric ever...ever...in my lifetime was in high yield.  The year was late 2008 or maybe it was early 2009. For context, keep in mind that this was when repos were about to freeze solid, capitalism was going to die, I had already lost 1/2 (ok not half but half sounds more dramatic) my net worth, I was in the middle of losing half of the other half to a divorce (that half is true), and I was in the middle of a move from MN to FL (this is PTSD territory btw). There was no plausible reason for me to exit my crouch of existential and financial fear. Except my advisor mentioned that HY credit spreads were around 25 points. Hmmm, 25 POINTS you say? OK, well, maybe just a little.  Ok, no wait, let's go big, really big; this is historic.  Here is the chart from Picerno's blog:

Not only did the after-tax capital gain represent almost 4 years of retirement expenses all by itself (a wee bit less after the lawyers...), it also paid a ton all through the rest of 2009 and some of 2010.  I was feeling pretty smug (until the divorce anyway) while everyone was losing their minds.  I pray that I'll have the courage to do something like that at least once more in my lifetime.  I agree with James that HY buy and hold is a bad odds bet right now but it's good odds that I will watching this chart forever. There's also a lesson somewhere in there about keeping a decent allocation to cash but that'd be another post.