It's the day after the Fed's historic interest rate hike, and U.S. stocks are lower in early afternoon trading, with the Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) down 0.83% and down 0.98%, respectively, at 12 p.m. EST. Unsurprisingly, the two most popular high-yield (or "junk") bond ETFs, the iShares iBoxx $High Yield Corporate Bond ETF and the SPDR Barclays High Yield Bond ETF are also down, by 0.68% and 0.69%, respectively. For a value investor, that only makes them more attractive.
When you're hunting for investment ideas, it's worth listening to successful investors, but the ones you should listen to most attentively are those who have been successful over very long periods, i.e., periods that cover multiple market cycles, bull and bear: A lengthy track record helps to sift out the lucky, small-f fools.
Dan Fuss, who manages the flagship Loomis Sayles Bond Fund, has witnessed more than one credit cycle -- he joined Loomis, Sayles & Company in 1976. Over the 10-year period ended on Sept. 30, the retail class of his fund has produced an annualized return of 6.01% against 4.61% for its benchmark. That's enough to put the fund in the top 7% of bond funds within its category, according to fund research house Morningstar.
In an interview with Bloomberg last Tuesday, Loomis told Bloomberg Television:
It's the second opportunity [for high yield] within the last decade. '08 was a classic -- in fact, the most attractive time to buy high-yield because you had no bid in the market. This one is more like '04 or the year 2000 ... excluding the energy and mining areas because they're in their own world. Other than energy and mining, you've got a lot of bargains out there.
He's not wrong about 2008. The following graph shows the performance of the Merrill Lynch High Yield Master II Index, a widely followed benchmark index for the high-yield market, starting from the crisis trough of Dec. 12, 2009. As you can see, from that level, high-yield bonds have generated returns that are positively equity-like, with the index more than doubling since then:
Since Loomis' interview, the market has only become more attractive. Last Thursday, Third Avenue Management unexpectedly blocked redemptions from its Third Avenue Focused Credit Fund, which was filled with highly illiquid bonds at the lowest end of the credit spectrum (bonds of companies that have already defaulted or unrated bonds, for example). The company also announced that the fund would be unwound over time.
It's highly unusual for a fund manager to put up a "gate" on a mutual fund, and the event sent a wave of fear washing through the high-yield market.
The following graph tracks the Merrill Lynch index spread, or the incremental return that investors require over the (risk-free) Treasury yield to own junk bonds:
With the spread starting to approach the levels reached during the government budget crisis of August 2011, junk bonds look like they now offer genuine value, for the first time in quite a while.
Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.