Editor's Note: Below is a brief excerpt from a research note sent to subscribers earlier this morning on our short Junk Bonds (JNK) call. With the stock market tanking, junk bonds are also down -0.5%.
(To be clear, short JNK made its first appearance in Real-Time Alerts in Q4 2014 and has been on our high-conviction Investing Ideas list since October. Since then, JNK is down -15.8% and -7.5% respectively.)
"... The latest Dealogic data shows that speculative-grade U.S. companies have not issued new bonds since the middle of December, the longest stretch without a new junk offering since the depths of the last credit cycle in 2009.
As we highlighted on our Q1 Macro Themes presentation on Tuesday, this particular credit cycle is just getting started. Delinquencies on all C&I loans having accelerated from down -8.9% at this time last year to up +26.8% yoy as of 3Q 2015; that’s the highest growth rate of souring loans since 2009 and calls into question Standard & Poor’s projected default rate of 3.3% by September.
While we’re not expecting anything in the area code of 12.4% which is the peak default rate reached in the financial crisis, we’ll take the over on the S&P figures all day. With the JNK ETF having dropped -16.5% since we turned bearish in August we again find it appropriate to reiterate our explicitly bearish bias on high yield credit."
Click here to read a recent post by McCullough outlining our Junk Bond call. Below is a video of McCullough discussing it on Fox Business.