High-Yield Bonds: Not So Junk Anymore

From a risk/reward perspective, junk bonds were the best asset class to put money into over the past two weeks.
The Fed's recent Bazooka is taking this premise into a new level of attractiveness, possibly making junk bonds the best place to be in on both relative and absolute terms.
Not all HY bonds are born equal though, and it's important to understand what you're getting into.
While many HY bonds are certainly not junk anymore, there are HY pockets that were - and will remain - under great pressure. That, of course, unless the Fed fires another Bazooka soon.
The new Fed balance sheet winning number is $6.08 trillion!

But the truly winning lottery ticket was US high-yield ("HY") aka junk, bonds. These lower-rated types of debts, as the Fed fired another $2.3 trillion bazooka, expanding its asset shopping list to also include junk bonds (for the first time ever).
As a result, US junk bonds (HYG, JNK, BKLN, HYLB, SHYG, SJNK, USHY, SRLN) rally most in two decades, with Fed now a buyer.
After reaching 1100bps on March 23, the widest level since the global financial crisis, the average risk spread of US junk bonds to US Treasuries has narrowed 86bps to 785bps - the lowest level since March 13.

The funny (or scary) thing is that the Fed hasn't yet exhausted its ammunition. There's more it can do as part of the war against the virus, and this is a wartime degree of commitment to credit policy.

While the Fed announcement contains a few surprises, including its purchase of junk bond ETFs, not all HY debts are treated equally.
For example, if you're jumping on collateralized loan obligations ("CLOs") focused operations/managers (Oxford Lane (OXLC), Eagle Point Credit Company (ECC), Ares Management (ARES), Saratoga Investment (SAR)), you might want to rethink your stance before you automatically jump into those, because there's a catch to the Fed's purchasing program: It will only buy AAA bonds of CLOs that hold... Read more