TWO-WAY AFFAIR

 
 The effects of fear are a two-way affair.

For a good example take a look at the recent changes in high-yield junk bonds and Treasury securities.

Fear is pushing the prices of one down and the prices of the other up. Just the reverse is true on the yields of both. Yields for junk bonds are rising and for Treasuries declining. Much of this reaction, though they and their supporters are apt to deny it, can be placed at the entrance of the Eccles Building in Washington.

Forget for a second the concerns about slowing global growth. When you flood the market with bunches of free money you raise the specter of possible inflation whether you want to admit it or otherwise.

Easy money usually translates into to a weaker currency or decreased purchasing power, a form of inflation whether those officials want to admit it or not. Zero interest rates make folks chase riskier, higher yielding investments. Now you have a brief picture of what more QEing does.

 Since July when Fed Chair Janet Yellen mentioned her concern about valuations in some assets, one of which was high yield, high yield bonds have been under pressure pushing down performance and helping further push up Treasuries.

Lots of money recently flowed out of junk bond funds as yields went up and total returns declined. Some bond fund managers are now suggesting there's money to be made in the high-yield bond market.

Early last week the Wall Street Journal noted: 

High-yield bonds tracked by the bank yielded 6.61% on Tuesday, closing in on June 2013’s high of 6.95% during the so-called “taper tantrum” when investors rushed out of risky debt.

Energy and mining junk bonds were especially hard hit, as investors fled to the safety of government bonds and pulled the yield on the 10-year U.S. Treasury bond at one point below 1.9%, to its lowest level since May 2013. Still, many large high-yield investors saw the dip as little more than a buying opportunity.

Patrick Maldari, senior fixed-income investment specialist at Aberdeen Asset Management, which oversees about $550 billion of assets, said the firm was busily reducing cash it had piled up on the sidelines by adding to its junk-bond portfolios.

“We’re putting money to work,” he said. “We think the trajectory for credit is still pretty good.”

Like we said: Fear and its effects are a two-way affair.