Monday, January 5, 2009

The potential for a panic rally (2)

More and more it's looking like November was the bottom. Swap spreads and junk bond yields are down signficantly. Panic is subsiding and equity prices are moving higher. Commodity prices appear to have bottomed. 3-month T-bill yields were negative a month ago, and today's auction came with yields of 15 bps. 10-year Treasury yields have jumped 45 bps in just the past week. The price of safety is going down, and the prices of risky assets are going up: with mountains of cash out there still yielding almost zero, this could turn into a panic rally pretty quickly.

Full disclosure: I am long IVV and HYG as of this writing.


jj said...

Scott, great call on HYG. I had to sell some BRk.b in an inherited IRA to take a required minimum distribution and have a few bucks left over still in the IRA. I'm wondering if you think there is much still left in the HYG move? Thanks

Scott Grannis said...

High yield in general still looks cheap. HYG is a high-quality junk fund, and its yield has now fallen to 7.9%. Attractive, but not terribly so. You might consider EMD, an emerging mkt debt fund yielding 13.5%. There are lots of high yield funds trading a big discounts to NAV but I'm not an expert on which one is best.