Blumenthal On Bonds

By Steve Blumenthal, CIO
CMG Capital Management Group

Trend following process moved us from HY
to very short-term bond exposure last week

For more than 22 years I’ve been trading the intermediate-term trends in the high yield market. I wake up each day, grab a coffee and sit in my favorite chair. With laptop online, the first thing I do is look at the prior day’s high yield bond mutual funds’ closing prices – it’s a pretty long list. Do anything for that long a period of time and you gain a feel for trend. Of course, my wife looks over and says, “Looking at charts again.” It has remained so interesting to me. I know – I need to get a life.

Anyway, I’ve been warning on the coming default wave in high yield and I can say with some confidence that high yield is usually one of the first asset classes to warn of recession. Though, of course, past performance means zilcho in this business.

Our trend following process moved us from HY to very short-term bond exposure this past week. Much of the weakness is tied to the price of oil as a meaningful percentage of high yield bonds are tied to the energy sector. Yet, more than $1 trillion of new money has flowed into the space over the last five years. Investors are seeking higher returns due to six years of zero bound interest rates and trillions in Fed-related QE bond buying driving yields to near all time lows.

So it is a good idea to remember that, “A safe investment is an investment whose dangers are not at that moment apparent.” That is particularly true for high yield today. It is also true for stocks yet both could continue even higher.

Will this be the high yield market sell signal that we look back on that identified an inflection point? I doubt it but I can tell you we’ll only know in hindsight. Today, more than any time I recall in my 30 plus years in the business: risk management is mandatory.

Read the rest of the story and important disclosures in On My Radar: Purgatory and Bubbles