HYBRID VIGOR: VOL 3 ISSUE 9 "Weak Hands or Just Small Ones?"

The rally of the last few weeks has taken 2016 from feeling like a looming catastrophe to just, for the moment, a pretty lousy year. Things being what they are, the average investor probably sold into the abyss and is now chasing his or her way back in significantly higher.

But enough of that market performance stuff. How do convertible bonds measure up, you know, where it counts?

High-yield bonds get to show off their stuff up front. You see a big double-digit yield and you know you’re dealing with some man-sized stuff right there. When high yields were getting kind of little—you know, 4 and 5 handle kind of things, that was nothing to brag about. Nothing you’d stand up and tell your country to grab hold of. Nothing that you’d assure voters you’d never gotten complaints about.

High-yield bonds came roaring back last week with energy and energy stocks. In fact, we were all set to run a big high-yield piece, but we decided to go back and reevaluate given the changed market conditions. Call us choke artists if you must, but you certainly won’t call us liars.

Poor convertible bonds and their managers. Yields are usually scrawny, by comparison with the guys on the right and left, even at the best of times. Good luck trying to brag about risk/reward profiles on prime-time national television. The audience doesn’t want to hear it. “Who’s that guy trying to sell a bond with a 50 basis point coupon? Get him out.”

Showy our market is not. But one thing convertibles have is endurance. Over years and years, they perform, and their relatively low shrinkage factor (compared with stocks) leads to better pounding—er, compounding—effects. So when prospects ask why the yields are so small, just remind them that it’s all about staying power.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).