Why own junk debt?

Discussion of the Bond portion of the Permanent Portfolio

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ochotona
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Why own junk debt?

Post by ochotona » Sat Feb 17, 2018 7:00 am

If you compare a portfolio of 100% JNK against 25% VTI and 75% AGG,

From 1/1/2008, VTI and AGG have the same CAGR as JNK, double the Sortino ratio, 1/3 the drawdown. Seriously, why would anyone ever want to own junk debt? It's just opioid for yield-starved seniors.
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Re: Why own junk debt?

Post by D1984 » Mon Feb 19, 2018 1:51 am

ochotona wrote:If you compare a portfolio of 100% JNK against 25% VTI and 75% AGG,

From 1/1/2008, VTI and AGG have the same CAGR as JNK, double the Sortino ratio, 1/3 the drawdown. Seriously, why would anyone ever want to own junk debt? It's just opioid for yield-starved seniors.
As a general rule, buying and holding junk debt via an index fund that owns the whole junk bond index is a losing trade but there are at least two instances where owning junk makes some sense.

1. The first is market timing; pick some of the junkiest of the junk bond funds (FAGIX comes to mind; they tend to own a lot of CCC-rated and unrated junk bonds) and put it into PortfolioVizualizer using a 10-month or 8-month or 12-month moving average. Beats the S&P 500 or total stock market with much lower drawdown. This seems to be because junk bonds sell off hard (far more than is justified by default rates vs recovery rates) during market falls but then lead the way during recoveries (see 1991-92, 2003, and 2009) when they go up in value at a far faster rate than stocks typically do; timing the market means you miss most of the downturn but capture much of the upturn. Timing the market with junk bond funds can have a Sortino above 2.

2. If on the other hand one plans to buy and hold then do just the opposite of the above; buy the highest-grade junk bonds (the so-called "fallen angels" ) you can either using an index ETF like ANGL or a mutual fund that buys high-grade junk bonds like PHYSX....although do note that PHYSX typically holds somewhat lower rated debt than ANGL does. Returns on both of these (or rather on the underlying index in the case of ANGL--if you have SekingAlpha Pro access see https://seekingalpha.com/article/4102914-fallen-angels and the underlying predecessor separate account in the case of PHYSX--see https://finance.yahoo.com/quote/physx/performance and http://www.pacificincome.com/wp-content ... pectus.pdf) have beaten or at least nearly equaled the S&P 500 or TSM with less drawdown and less risk. This basically happens because once debt reaches "fallen angel" status (i.e. once it gets downgraded to just one notch below investment grade) none of the pension funds, insurance companies, non-junk bond bond funds, etc are allowed to own much or any of it; thus demand for it is not as high as one would expect for something just below investment grade so by purchasing fallen angels one is essentially getting a near investment-grade bond at middling-grade junk bond yields.

Other than that....yeah, probably best to stay away from junk bonds.
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ochotona
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Re: Why own junk debt?

Post by ochotona » Mon Feb 19, 2018 4:38 am

Interesting idea, trendfollowing junk bonds. I'll investigate.
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ochotona
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Re: Why own junk debt?

Post by ochotona » Mon Feb 19, 2018 7:41 am

Replying on VP thread, "Dual Momentum GEM + HBPP a great combo, easy to test"
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Re: Why own junk debt?

Post by boglerdude » Tue Feb 27, 2018 1:06 am

D1984 wrote:If on the other hand one plans to buy and hold then do just the opposite of the above; buy the highest-grade junk bonds (the so-called "fallen angels" ) you can either using an index ETF like ANGL [snip] once debt reaches "fallen angel" status (i.e. once it gets downgraded to just one notch below investment grade) none of the pension funds, insurance companies, non-junk bond bond funds, etc are allowed to own much or any of it; thus demand for it is not as high as one would expect for something just below investment grade so by purchasing fallen angels one is essentially getting a near investment-grade bond at middling-grade junk bond yields.
Neat. Any other tips for buy and holders? I want to be able sell whatever's up, in case I need the money.

Howbout commodities, beaten up eh? http://www.etf.com/DBA
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ochotona
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Re: Why own junk debt?

Post by ochotona » Tue Feb 27, 2018 5:23 am

I did tax loss harvest some Treasuries yesterday. Will rebuy similar ones in 31 days
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