By Dan Weil From Moneynews

The Barclays U.S. Corporate High Yield bond index has plunged 3.1 percent so far this month, and this may be the beginning of a burst for the junk bond bubble, says legendary investor Carl Icahn.

“The one area I think is getting to be a bubble is the high-yield market,” he tells Bloomberg. “These bonds are still at way too low an interest rate. In other words, you can borrow money too cheaply if you’re a risky company.”

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The Barclays index carries a yield of 7 percent.

“There are arguments that there’s a lot of cash flow to cover the interest payments on the bonds,” Icahn says. “But some of that cash flow is ephemeral. It’s not likely to last. It’s a bubble that’s going to burst in the next couple of years.”

High-yield energy company bonds already are dropping amid the plunge of oil prices to a five-year low. “That might be construed as proof of what I’m saying,” Icahn notes.

“Oil will be a great opportunity, but not now. The energy sector is probably in for more problems. Oil prices will probably go down more, and these energy companies, especially oil service companies, are going to be hurt. But then I think there will be a tremendous opportunity,” he adds.

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“Oil prices will eventually recover, because worldwide demand will continue to grow and supply will diminish, due to depletion. Additionally, the cost of finding oil is growing. We are not coming up with enough alternative energy that quickly,” Icahn explains.

“Patience is one of the most important attributes of a successful investor.”

The weakness for energy company bonds already has spilled over into junk bonds for other industries. All 21 of the sectors in a JP Morgan Chase high-yield bond index produced losses in the five days through Dec. 9.

“Oil prices have crushed the energy sector and it’s leaking elsewhere,” Andrew Herenstein, co-founder of Monarch Alternative Capital LP, which is among the largest investors in distressed debt, tells The Wall Street Journal.

For more on this story go to: http://www.Newsmax.com/Finance/Icahn-junk-bonds-bubble/2014/12/15/id/613069/#ixzz3Mev2hL57

 

EDITOR: DEFINITION of ‘Junk Bond’

A colloquial term for a high-yield or non-investment grade bond. Junk bonds are fixed-income instruments that carry a rating of ‘BB’ or lower by Standard & Poor’s, or ‘Ba’ or below by Moody’s. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.

INVESTOPEDIA EXPLAINS ‘Junk Bond’

Junk bonds are risky investments, but have speculative appeal because they offer much higher yields than safer bonds. Companies that issue junk bonds typically have less-than-stellar credit ratings, and investors demand these higher yields as compensation for the risk of investing in them. A junk bond issued from a company that manages to turn its performance around for the better and has its credit rating upgraded will generally have a substantial price appreciation

SOURCE: http://www.investopedia.com/terms/j/junkbond.asp

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