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Energy Bonds Soared 37% in 2016

Energy Bonds Soared 37% in 2016Energy Bonds Soared 37% in 2016

In a normal year, double-digit returns for the average investor would be a cause of celebration. But 2016 was not a normal year. At the start of 2016, energy investors were in a state of panic. Oil prices were crashing to their lowest levels in more than a decade, bottoming out in the mid-$20s per barrel.

Share prices plummeted, stock indices were down, companies were defaulting and declaring bankruptcy, and creditors were getting stiffed by indebted drillers. Unless you were shorting the sector, there was little place to hide, oilprice.com reported.

An understandable reaction might be to liquidate one’s positions, putting money in safe-haven assets or diversifying into non-commodity sectors. However, a shrewd investor would have recognized a golden opportunity. It was a good year for bond investors who got in at the right time. Junk-bond indices soared by roughly 17% this year. Bloomberg found that the median high-yield fund with assets of at least $1 billion saw returns north of 13%.

But while some investors might have been pleased with those healthy returns, they would have missed out on a much bigger opportunity this year. According to Bloomberg Barclays data, energy bonds surged more than 37% since hitting a bottom in February, a return much larger than other debt.

Gershon Distenfeld, a manager for the AllianceBernstein Global High Income Fund, told Bloomberg that his fund saw returns of 23% this year. They loaded up on distressed energy and mining debt late last year, betting that bond payers would not default. “People capitulated and they ended up selling paper at very distressed prices,” Distenfeld said. “Markets tend to overshoot. The key is to be patient.”

 

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