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A Look at a Market That Punishes Risk

by: Brett Steenbarger October 03, 2008 | about stocks: DBC / FXE / HYG    
Brett Steenbarger

Brett Steenbarger

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Since July, we've seen commodity prices collapse (top chart), the U.S. dollar rally furiously versus the euro (middle chart), and high-yield bond prices collapse (bottom chart). It's not exactly the inflationary scenario that some envisioned as the result of the rescue legislation--at least not yet. This is a market that is punishing anything associated with risk, which explains the massive flight into short-term Treasury instruments despite their paltry (and significantly negative real) yields.

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This article has 2 comments:

  •  
    Oct 03 05:31 PM
    Yep, this market punishes risk. No two ways about it. It seems the streets have started bleeding. And the bleeding will get worse......

    But in terms of the junk bonds, with closed end funds trading at a 20% discount to NAV and yields of 15ish %, it seems that it might be worth scaling into a few of these dogs that everyone is throwing out. Same might be said for closed end, investment grade, muni bond funds with 6.5-7 tax free payouts.

    I'm thinking here that even if these things collapse another 10 or 15 percent, if you scale in, and you're collecting the coupon as you go, you have a pretty good chance of beating 3month t-bills in a year. Of course, if you belive the world is coming to an end, well, then t-bills are probablly the best choice.

    Reply
  •  
    Oct 04 11:39 AM
    Same old, same old.

    The only remarkable thing is how wrong most of the prognosticators (might be) who repeated, ad nauseam, "commodity inflation and a much lower dollar."

    We all need to remember that the majority can all be wrong and especially the people who predict the future with the most confidence.

    The key thing is to point out fundamentals and various historical reactions to similar fundamentals and then admit that it isn't possible to predict with any degree of certainty which scenarios will play out.

    Deflation has also occurred, all too often, in the past, accompanied with its well-known destructive effects.

    Several signs of returning deflation have been consistently ignored by almost everyone: Falling housing prices, falling stock prices and a looming recession are the most obvious.

    Consistent over consumption, combined with lack of savings, in the first world usually leads to a wave of reduced spending ("belt tightening") which would also be deflationary.

    Reply
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