High Yield Bonds emission process

Investing Strategies Bonds & Fixed Income Investments
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Greetings!

Please excuse me for posting here as I am not sure that this is the right board, but I think it’s the most appropriate.

How do High Yield Bonds go through the process of emission? I tried researching the global trend, but I couldn’t find anything cohesive.

As far as I understand - there are anouncements in Bloomberg. Not all people have a terminal.

How is the book building process built and documented?

Can retail investors participate in the emission?

To what extent are junk bonds openly available for retail investors? Are they more often encountered ‘clean’ or as part of a fund?

Thank you in advance for any information!

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“How do High Yield Bonds go through the process of emission?”

Obligaator,

What the heck is “the process of emission”? Never heard of it, and I’ve been buying bonds --across the yield-curve and up and down the credit-spectrum-- for a lotta years,

If you want to buy spec-grade bonds, you can do so through most brokers. But be forewarned it’s a tough, tough game to play in current market conditions.

Charlie

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Most bonds are traded over the counter. Your broker has an inventory of bonds and will quote you a price on any bond rating and maturity you specify. They will also buy your bond if you want to sell. Usually no commission but they make money on the bid ask spread.

Bonds come to market through investment banks who arrange to market them through brokers.

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Paul,

What you say about bonds isn’t accurate. Typically, most retail brokers --Schwab, Fidelity, E*Trade, IB-- don’t carry an inventory of bonds, nor are they willing to buy them. Instead, they are mostly acting as a middle men to the underlying decks that do own the bonds or buy them. It’s those underlying desks that one is dealing with on the bid or ask side of a trade.

Why is that distinction important ? Because those desks set the mins, not the retail brokers.

Charlie

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Thanks, Charlie. I will defer to your experience. You are dealing with the “bond desk” at your broker. But apparently that is an outside service.

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Paul,

Bond desks aren’t “an outside service”. They are the underlying network of dealers that retail brokers access and make available to their clients. The exception at the retail level is IB where it’s possible to act on one’s own behalf as one’s own underlying desk.

In other words, rather than screw around with what amounts to an email messaging service, one’s bid or ask is displayed for all dealers in the network to see, and they respond directly as they choose to (or not).

Again, why is this important? If one is going to traffic in junk bonds, then sizing positions properly becomes a matter of survival. Who sets the size? Not the retail broker, but the underlying desk. But if the min for the NBBO for an issue is bigger than one’s risk metric would permit, one has to back off from executing or else bid up in the order queue.

Again, go back to basics. In bond investing --and I do mean ‘investing’ not ‘trading’, which is tough to do at the retail level-- one is always making one of two bets. One is betting on the level/direction of interest-rates, or one is betting on the level/direction of an issuer’s credit-worthiness. If one is doing the latter, then losing bets have to be expected, a lot of them. So positions have to be kept small, or else the risk of ruin arises.

How small? That depends on one’s account. Generally, a single bond isn’t marketable. That means one is committed to 'min-two" and often ‘min-five’, as is nearly always the case in the muni market, and often a whopping min-100 in the foreign sovereigns market.

The next question becomes "What might be a prudent allocation to junk vs invest-grade debt?" I prefer to work with Graham’s risk categories thusly, where the percentages for each tranche are determined by present market opportunities and how hard one is willing to work.

  • Cash and equivalents (%?)
  • Defensive (%?)
  • Enterprising (%?)
  • Speculative (%?)
  • Non-performing. Hopefully zero, but realistically as much as 5% to 8% of AUM if one is buying junk bonds (or junk stocks, which how much of what TMF touts should be categorized).

Back in the day, when opportunities were a plenty, I ran an all-bond portfolio whose returns reviled those offered by equities.

Cash and equivalents, 10%
Defensive bonds, 40%
Enterprising bonds, 30%
Speculative bonds, 20%
Zero stocks

These days, for my current income streams being 4x my current expenses and not needing more money nor wanting to work as hard as I once did, I’m running the following allocations:

Cash & MM funds, 2%
T-bills, 55%
Bonds (all risk categories and all issuer types), 40%
Stocks/ETFs/trading experiments, 3%

Presently, we’re in a recession, with a depression on the horizon. When it happens, then I go back to doing classic, Ben Graham value-investing, just as I did in '09. Meanwhile, I roll T-bills and build boats.

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Charlie

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Did you perhaps mean to state issuance?

Like others, I have never heard of emission as it pertains to bonds and can find no reference to such via an internet search.

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I’m no sort of economist, but brief googling found several “will be in 2024” opinions, along with “not expected in 2024”. I did not come across any that agreed with a "we are currently in one.

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RHinCT,

The stock market is NOT the economy, nor is our dear gov’t telling us the truth about nearly anything, because there’d be massive backlash at the polls as we --the people-- throw the bums out of office.

Yes, it is difficult to find anyone part of the so-called “main-stream news media” who is willing to do the legwork that good economic research requires, as opposed to repeating mere propaganda.

Like them or not, dismiss them or not, people like Doug Casey, Paul Craig Roberts, David Stockwell, Peter Schiff, Gerald Celente, Lena Petrova, Ron Paul, etc. do offer opinions --based up by data-- that should be considered.

But let’s cut to the chase. Danielle DeMartino Booth isn’t some “money honey” who’s carrying water for Biden. Nor is she a gold bug hoping that PMs will finally have their day. She worked at the Dallas Fed and knows the game from the inside.
If she says the US is already in recession, then we’re already in recession, and she proceeds in her many interviews to a make solid case. Here’s just one example.

Now, why does this stuff matter? If one believes the US has a strong economy, one uses that macro-economic view point to manage risk. If one believes otherwise, then other paths are chosen.

If one looks at just a single phenomenon, namely, de-dollarization and the increasing cooperation among the BRICS Plus, it is easy to see the consequences for US and its Anglophone partners. How soon–if ever-- will the $US loses it status as a ‘reserve currency’? But already the $US is being supplanted as a ‘settlement currency’. Translation: The Global Majority is getting out of $US dollars as fast as they can, putting the kibosh on the Fed’s ability to print money to run our deficit economy and/or fund our foolish foreign follies. That means the US will have to raise interest-rates, as well as deal with hyper-inflation, both of which are economy and stock market killers.

So, what to do in the meanwhile? Learn to sell short. (IMO, natch, because when the US falls apart, so will much of the world.)

Charlie

PS Here’s another rip. https://www.youtube.com/watch?v=vcU-5HAS0Mg

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Except the title of the article says “may already be” not “is”. And in the article itself, it says:

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which is contradicted by the fact that 23Q4 and 24Q1 GDP growth rates were still both positive at 3.4% and 1.6% Sure, they’re both down from the 4.9% in 23Q3 - but that was too high to maintain.

And never mind that despite the job cuts accelerating, initial jobless claims data.pdf (dol.gov) have not accelerated - they’re actually down from last year.

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Forecasters who base their forecasts on a single data point are often wrong.

AJ

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AJ,

Dig a bit deeper into the touted GDP numbers and ask what they are based on. "GDP’ is a misnomer. Rather than being a useful measure of Domestic Productivity, a better term would be ‘GDS’, aka, Gross Domestic Spending. Who is the biggest spender in the US? Our dear gov’t Where does our dear gov’t get its money? Partly from taxes, but increasingly from printing.

So, pull out of GDP the borrowed money the US go’vt spent (under Trump as well as Biden). In fact, pull out all so-called “stimulus money” since 2008. What you do you see? A declining economy that’s in a recession.

Differences of opinions make markets. Many think the US economy is strong, and they position their portfolios accordingly. I think the US (and its empire) is falling apart, and I am willing to bet accordingly. Who will be proven correct? Who knows? But not trusting the official narratives is what I’m comfortable with.

Charlie

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So with your thinking we’ve been in a recession since 2008?

HAHAHAHAHA

Whether the money is borrowed or not, it’s spent on goods and services, and ends up in people’s paychecks for them to spend. I won’t disagree that there is a need for the government to stop borrowing as much, but you can’t just ignore spending of borrowed money.

And you completely ignored the fact that the job loss acceleration isn’t tracking with jobless claims, so your forecaster is making their forecast based on data that is in dispute.

AJ

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Charlie!

Thank you very much for your reply!
By “process of emission” I meant issuance.

~ Alex K.

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Charlie,

What a beautiful, well crafted looking boat!!!

d fb

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It’s not possible to throw the bums out of office - they’re ALL bums.

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Hawkwin,

Indeed. My bad, language barrier.

~Alex

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If you are trying to purchase any bond in the primary market (at issuance), you will want to check with your broker on their process.

Note, you may be required to have a higher account status at a broker in order to qualify to participate in their offerings.

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flyer,

Thanks for appreciating the boat.

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AJ,

Actually, 2007 is closer when things began to fall apart. As for the jobs/unemployment numbers, those are totally bogus that the endless revisions never get right.

But as I said --or implied-- previously, what the actual facts might be doesn’t much affect me. My current income streams are 4x my current expenses. So I can absorb a lot of damage before my beer-and-bait lifestyle is negatively impacted.

But that isn’t the case with the average American household, half of whom don’t have even $400 in savings. If that fact doesn’t define ‘recession’, then tell me what does, and not the nonsense of “two consecutive quarters of negative GDP”.

Charlie

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Just for fun, we could go through the exercise of “pulling out” the borrowed money from GDP. In 2008, GDP was about $14T, and total debt was about $10T. Now, GDP is about $28T and total debt is about $34T. It’s critically important to understand that GDP is an annual measure … it happens every year, while debt is a cumulative measure … it is the total over all the years. So if we look at GDP growth from 2008 to now, it is somewhere around $100T total, while the debt went up a total of $24T. So subtract out the new debt of $24T from the new GDP of $100T, and you still have $76T of growth net of debt!