November 19, 2009, 5:00 am

Note to Myself: Key Points to Investing During a Bear Market Part1: Remember High Yield Bonds

by: The Financial Blogger    Category: Investment, Market and Risk,Trading
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I have made a major point of honour to take note of what life teaches me. We sometimes go through tough periods and we don’t really know why it is happening to us. We get hit as hard as being creamed by a train and we are standing in the middle of nowhere asking the very same question over and over again: “Why Me?”.

I actually found the answer to this question a long time ago: “Why You? Because sometimes life is a b&?%”. In fact, it’s nothing personal about you; it is only how life works. Once you have understood this simple (but tough to accept) concept, you can learn from life. And since human beings have a very short memory in general, I suggest you take note of your thoughts once a bad event occurred. This is what I am doing with the recent market crunch of 2008. Some people generated amazing returns by taking little risk. Here’s how they did it:

High Yield Bond Spread

There is always a normal spread between each type of bonds. For example, provincial bonds will be traded with a premium compared to federal bonds. AAA corporate bonds will follow almost the same premium compared to the provincial bonds and so on.

However, during a bear market, the spread between high yield bonds (aka junk bonds) becomes abnormally important. The par value of those bonds melts like chocolate bars in a microwave. Therefore, there is a huge spread between their yield and more secured bonds. Many investors leave the high yield bond market during economic crunches because they think that all of those companies are heading towards bankruptcy.

How To Benefit from High Yield Bonds Eventual Surge?

During every market recovery, one of the best asset classes is the high yield bonds (based on the above mentioned explanation). So if you are patient and man enough (or should I say woman enough?), you can benefit from this gap in the market.

High Yield Bond ETFs

If you buy 2 or 3 companies, you may make a mistake and lose a lot of money (after all there are companies that declare bankruptcy during bear markets 😉 ), however, you can buy a pool of High Yield Bonds through ETFs.

Since we are not really interested in the guarantee aspect of the bond, nor its yield (remember, you want to capture the price gap), you don’t have to worry about not holding the bonds and holding the high yield bond ETFs instead. The index will follow the market and give you back the growth during the recovering. This asset class was one of the first to hit the double digit returns in 2009. During more recovery markets, you can expect high yield bonds to jump by 20% to 30% in a span of a few months. This is why it’s a good asset class to consider after a few months of panic ;-).

If you want additional support to trade High Yield Bonds ETFs, I recommend the following tools:

INO Free Trading Course

:

I had mentioned it on my blog last week; this is a 10 lesson course on trading. The first lesson is actually to understand the importance of psychology in price movement. This should help you consider when it is the time to buy your high yield bond ETFs. You can register by clicking on this link. I have personally registered and can swear that it’s free and that you will receive your lessons by email.

Once you have decided to trade, here is a list (Canadian and US as of the beginning of November 2009) of High Yield Bond ETFs on the stock markets:

TICKERNAMEPRICE (last week)
ZHY (CDN)BMO high Yield Bond$14.93
XCB (CDN)ISHARES CDN DEX Corpo$20.46
JNK (US)SPDR Capital High Yield$37.98
EMB (US)ISHARES JP Morgan Emerging Market Bond$102.44
HYG (US)ISHARES High Yield Corp Bond$86.07

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Comments

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