Episode 387: The Overvalued Junk-Bond Market Still Has Pockets of Opportunity

On this week's Stansberry Investor Hour, Dan and Corey welcome Martin "Marty" Fridson back to the show. Marty is an author and expert in the field of high-yield bond investing. He is also a senior analyst at Porter & Co.'s Distressed Investing newsletter.

Marty kicks off the show by discussing the top-down view of the high-yield market. He comments that right now, there is a very small risk premium. Marty breaks down the factors that he uses in his model of fair value and concludes that the high-yield market is extremely overvalued. At the same time, the market is forecasting a higher default rate than credit-ratings agency Moody's. Marty also gives his opinion on whether we'll see a recession, what it means that the inverted yield curve has not yet resulted in a recession, and why he's less critical of the Federal Reserve than other investors...

When people talk about policy errors, you have to keep in mind that Fed policy famously works with a lag... You have many variables, many of which aren't even known and which don't even necessarily act in a consistent way over time.

Next, Marty explains that the current situation of the federal-funds rate and the 10-year U.S. Treasury yield moving in opposite directions is not rare. He says it happens 40% of the time. This segues to a discussion about what's happening with the junk-bond market... including companies potentially having to roll over their debt to higher rates... and private credit lenders now competing with high-yield bond buyers. Marty then names which sectors present attractive buying opportunities today...

Currently, diversified financial services, energy, building materials, homebuilders and real estate, and utilities are all in that category of being cheap despite improving outlooks... Those are areas where you should generate some superior returns.

Finally, Marty goes further in depth about his quantitative model and what data it draws upon to find attractively priced distressed debt. He then explains that because high-yield bonds aren't very liquid, exchange-traded funds centered around these investments tend to have a lot of variance in performance. This can have serious consequences in times of extreme market disruption. As Marty says...

The underlying securities are less liquid. And particularly for an open-end mutual fund that faces daily redemptions, that could become a significant issue. It would take a very severe market disruption, sell-off, loss of liquidity, and so on before it really became material, but it is a possibility that the managers have to be conscious of and protect against.

Click here or on the image below to watch the video interview with Marty right now. For the full audio episode, click here.

(Additional past episodes are located here.)

The transcript is coming soon.