If Wall Street Journal columnist Rolfe Winkler is right, then investors seeking “safety” could be on the verge of losing billions of dollars.
“Mr. Einhorn’s move might be the clearest signal yet that the bull market in fixed-income and high-yielding securities is well into bubble territory,” writes Winkler.
To me, the fixed-income marketplace appears to be overheating. There certainly could be more upside, but I see four distinct areas where yields are getting pinched. Here is a look at yields, asset prices, and of course, Apple Inc. (NASDAQ:AAPL)’s potential newest creation (hint: it’s not tech).
Treasury Yield Spread
It starts with the Fed. The Fed’s quantitative easing program pumped seemingly incalculable amounts of cash into the financial system by way of treasury purchases, which is why we saw treasury prices sky-rocket and yields crater.
Just last summer, for example, non-investment-grade “junk” bonds yielded roughly 7% higher than treasuries. Not anymore. Yield-starved investors have swallowed up bonds at a torrid pace, bolstering the bonds’ prices and pushing yields lower. The yield spread between treasuries and junk bonds is now near 5%, meaning that some fixed-income investors are willing to hold “junk” in exchange for yields under 7%.
For example, simply take a look at SPDR Barclays Capital High Yield Bnd ETF (NYSEARCA:JNK). The ETF closed Tuesday’s trading at $40.61, just below its 52-week high of $41.43. And the trailing twelve month yield? Just 6.72%. Look for that yield to drop if money continues to flow into junk bonds.
MLPs
For another signal that fixed-income is overheating, take a look at the MLP marketplace. The Alerian Mlp (NYSEARCA:AMLP) serves as a good indicator of this sector, because it holds $5.17 billion in assets. The ETF closed last Friday’s trading at $17, just below its recent all-time high of $17.40. Here is a look at the current breakdown of assets held by the Alerian ETF.
Source: ETFG.com, Institutional ETF Research
The Alerian index has risen 140% since 2008, about twice the increase of the S&P 500. Likely this is the result of large payouts. The fund just announced a payout of $.261 per share for the first quarter. At a price of $17, this indicates a forward 6.14% annual yield if payouts stay steady. And that is a big if.
The reason is because the sector is attracting major capital flows and high acquisition costs. Companies have been quick to spin-off some assets in the form of MLPs, because such assets are income-producing and can fetch higher valuations by trading in the marketplace rather than by sitting on a company’s balance sheet. And investors have been quick to scoop them up.
