Credit Markers and the “Fools Yield” (w/ Dan Rasmussen & Greg Obenshain) | Summary and Q&A

TL;DR

Greg Obenshain discusses the Fool's Yield concept, explaining that the reach for high yields in lower parts of the high yield market often leads to lower returns due to increased credit risk.

Key Insights

• 😘 The fool's yield refers to pursuing high yields in riskier segments, resulting in lower-than-expected returns due to increased credit risk.
• ✋ Obenshain's bond-by-bond analysis revealed that riskier bonds performed worse than expected, while higher quality bonds delivered better returns.
• ↩️ The BB to B rated bonds marked the dividing line where acceptable returns turned into losses, debunking the belief that 7% or 8% yields were easily achievable.

Transcript

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Questions & Answers

Q: What is the fool's yield concept?

The fool's yield refers to the pursuit of high yields in riskier segments of the high yield market, often leading to lower returns due to increased credit risk.

Q: How did Greg Obenshain determine the dividing line between acceptable returns and losses?

Obenshain built a bond-by-bond database and analyzed the historical performance of bonds at different yield levels. His research showed that bonds trading in the lower half of high yield had lower returns, while those in higher quality segments performed better.

Q: What was the surprising finding regarding the fool's yield dividing line?

The dividing line between acceptable returns and losses occurred between BB and B rated bonds, much sooner than many people anticipated. This means that aiming for a 7% or 8% yield was much more difficult than expected.

Q: How does the fool's yield concept impact investors and pension funds?

The concept warns investors, especially pension funds, who allocate funds to riskier segments in search of higher returns. Engaging in riskier behavior, particularly with high leverage, may lead to unsustainable outcomes.

Summary & Key Takeaways

• Greg Obenshain introduces the concept of the fool's yield, which refers to the pursuit of high yields in riskier areas of the high yield market.

• He explains that in this fool's yield environment, investors often end up earning lower returns than anticipated due to the higher base rate of losses in these riskier segments.

• Obenshain highlights that last year, the dividing line between acceptable returns and losses was between BB and B rated bonds, surprising those who expected higher yields.