Classic Safe Haven Hides in Plain Sight

Watch volatility spike, and then watch investors scatter for safety. Only this time, they don’t seem to know where to hide.

After years of calm, market turbulence has returned. The annualized daily standard deviation of the S&P 500 Index — a common measure of volatility — has been 18.6 percent from 1928 through March. But the market was much quieter from 2012 through January, with a standard deviation of 12 percent.

That quiet ended abruptly in February. The S&P 500 tumbled 8.5 percent in just five trading days from Feb. 2 to Feb. 8, and its standard deviation has spiked to 23.4 percent since February.

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Your Junk-Bond Worries Are All Wrong

There are reasons to be skeptical about high-yield bonds, but not for the ones investors have been worried about lately.

For starters, there’s little indication that investors are fleeing risky bonds for good. Yes, two of the biggest U.S. junk-bond ETFs have experienced outflows this month. Investors pulled $1 billion from the SPDR Bloomberg Barclays High Yield Bond ETF through Friday and $600 million from the iShares iBoxx High Yield Corporate Bond ETF.

But there’s nothing unusual about those outflows. The SPDR ETF experienced outflows in 30 of the 71 months since 2012, and the iShares ETF experienced outflows in 33 of those months. Both funds have also had bigger monthly outflows since 2012 than they’ve had so far in November. None of those occasions appear to have dimmed investors’ fondness for junk bonds. In fact, there are indications that money is already flowing back in.

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Pimco Wants Some Junk in Its Trunk

Pimco is gearing up for a junk bond binge — or at least opening the door to that possibility. The Pimco Total Return Fund, Pimco’s flagship bond fund, will be permitted to invest up to 20 percent of the Fund in junk bonds beginning on June 13, up from 10 percent currently.

The Fund’s current allocation to junk bonds is only 2.5 percent, so the new 20 percent ceiling would be a monster eightfold increase in the Fund’s allocation to junk bonds if fully utilized.

Why now? Mark Kiesel, Pimco’s chief investment officer for global credit and one of the Fund’s managers, told Bloomberg News that the junk bond market “is as attractive as it’s been in four or five years.”

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The Great Corporate Debt Scare

 A lot of people are worried about corporate leverage. Years of cheap credit have encouraged corporate borrowing, and credit spreads have widened recently on fears of a global slowdown — all of which makes for a potentially explosive cocktail. By one measure — the debt-to-earnings ratio — corporate leverage is at a 12-year high.

But other measures of corporate leverage suggest that fears of a corporate debt binge are overdone. According to Bloomberg data, the debt-to-Ebitda, debt-to-equity, and debt-to-assets ratios for the S&P 500 Index are all well below their historical averages since 1990. The U.S. is not alone. All three ratios for the MSCI ACWI ex-USA Index are also well below their historical averages since 1995 (for both the S&P 500 and ACWI ex-USA, the first year for which data is available).

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