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Energy Bonds Soared 37 Percent In 2016

Petchem plant

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.

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 percent this year. Bloomberg found that the median high-yield fund with assets of at least $1 billion saw returns north of 13 percent.

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 percent since hitting a bottom in February, a return much larger than other debt.

"In hindsight, we wish we bought almost every bond in the energy index in February," Michael Collins, a money manager at Prudential Fixed Income, told Bloomberg. “But the fundamentals for a lot of high-yield energy companies are still not that great.”

Related: The Overstated Impact Of Trump On Oil

Other investment firms fared better. Gershon Distenfeld, a manager for the AllianceBernstein Global High Income Fund, told Bloomberg that his fund saw returns of 23 percent 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.”

While the brave investor getting into energy in early 2016 ran against the grain, many more investors are interested in energy today. However, the problem is that returns are unlikely to be as big in 2017, with oil prices expected to stabilize in the $50s. It was a rare and brief opportunity for energy investors, and a few lucky ones profited in a big way.

By Charles Kennedy of Oilprice.com

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