Playing the Increase In Junk Bond Yields

Recent News

The debate continues on the merger of XM (XMSR ) and Sirius (SIRI ) Satellite Radio as the case again comes before the Senate Committee on Commerce for round four since its original proposition in February. Opponents argue that the merger will create a monopoly, leaving a sole provider for satellite service to consumers. This, they argue, will lead to increased prices and decreased content. Advocates argue that the merger is necessary in order to compete against other technologies, including terrestrial radio, MP3 players, CD/DVD etc. The inference is that the battle between the two small companies for the limited audience is splitting the market and preventing its advance against the other technologies.

Home

Neubert's Trades

Playing the Increase In Junk Bond Yields

Written by David Neubert

I started a small position in the Morgan Stanley High Yield Fund (MSY - $5.76) today. According to the Closed-End Fund Association website, the Morgan Stanley closed-end fund is trading at at 14% discount to Net Asset Value of $6.72. The recent increase in junk bond yields (drop in prices) has made me neutral on the sector (from negative).

MSY analysis:

Positives:
1. Junk bond (non-investment grade) yield spread have increased lately, meaning investors get paid more for taking additional risk.
2. MS High Yield fund is at a big discount. I'm buying the underlying bonds at a 14% off to what it would cost to buy them directly. Now there is no guarantee this discount will close, but a 15% discount does tend to set a floor for this fund.
3. Yield of 7.5%

Negatives:
1. Rising defaults on junk bonds could hurt this fund.
2. Potential for rising interest rates.
3. The huge expense ratio 2.00% charged by Morgan Stanley Asset Management for managing this fund should keep the discount to NAV from improving all the way to zero.

Disclosure: I own MSY as described above. I may buy more in the near future, depending on prices and market conditions. I may also sell this fund and switch to Indexed Exchange Traded Fund that specializes in junk bonds like (HYG - $104.39) if the discount to NAV closes significantly.

I have been previously employed as a Managing Director at Morgan Stanley. I worked in the equity trading division and did not deal with Morgan Stanley Asset Management. I am still vested in their pension and executive compensation plans. I own Morgan Stanley (MS) stock.

Junk Bonds