Following a 2.1% decline in junk bonds, the most since 2013, BlackRock and Morgan Stanley say yields are enticing.

Apparently there is never supposed to be a decline ever because with that trivial decline, Wall Street Declares All Clear for Junk Bonds.

It’s time to get the junk-bond party going again.

Morgan Stanley (MS) to BlackRock Inc. (BLK) say it’s time to buy after yields on high-yield, high-risk securities rose to the highest in a year on Sept. 29, resulting in losses not seen since the mid-2013, Federal Reserve-induced taper tantrum.

“We now see risk/reward as more attractive than it has been in over a year,” Morgan Stanley analysts Adam Richmond and Jeff Fong wrote in a report today titled “Buy High Yield.” While junk-bond buyers seemed sanguine about risk earlier in the year as the market soared, “we no longer see the same complacency among investors in aggregate.”

After Fed officials bemoaned the $1.3 trillion market for showing “reach-for-yield” behavior earlier this year, investors have been souring on the notes that posted annualized returns of 18.6 percent since 2009. The notes lost 2.1 percent in September, the most since a 2.6 percent slump in June 2013, according to Bank of America Merrill Lynch index data.

Yields on the speculative-grade debt have risen to as much as 6.74 percent on Sept. 29 from the record low of 5.69 percent in June, the data show. They were at 6.35 percent as of Oct. 3.

“High-yield has widened out and increased in attractiveness,” Jeffrey Rosenberg, the chief investment strategist for fixed-income at New York-based BlackRock, said in an interview today with Bloomberg Television.

Perspective on “All Clear”

Let’s put a bit of perspective on the “All Clear” signal using the Barlclays high yield fund (JNK) as a proxy for attractiveness, complacency, value, and risk in junk bonds.

JNK Monthly Chart

click on chart for sharper image

I am relieved to know that things are “all clear” and it’s “time to get the junk-bond party going again“.

I am wondering though, since March of 2009, when did the party ever end?

Key Questions of the Day

  1. Do these guys really believe what they are saying?
  2. Or, by any chance are BlackRock and Morgan Stanley looking to dump what they have, and that’s the reason for the “all clear” call?

Either way, the answer isn’t pretty.

Mike “Mish” Shedlock