James McHugh isn’t afraid of a little risk. The trouble this year has been knowing where to find it. Crypto burned him. Meme stocks are stuck in the pits. So McHugh, a 36-year-old who works in Houston’s oil and gas industry, has been getting his fix in a corner of the market retail investors typically overlook — junk debt.
His target is Bed Bath & Beyond Inc., a company the WallStreetBets crowd cornered at the height of last year’s retail mania for stocks. He recently picked up a “gambling amount” of the struggling retailer’s bonds, some maturing as far off as 12 years from now. Those were 17 cents on the dollar. That discount promises a gigantic return — if Bed Bath & Beyond can last until 2034.
McHugh moderates r/bonds, the Reddit forum where retail traders come to swap tips and research on debt. He’s seen traffic this year skyrocket. Twitter users post snarkily about their returns versus crypto. And on YouTube, presenters promise everyday bond buyers can get rich fast — and, because these are bonds, in some cases more slowly — if only they can master credit ratings and coupon rates.
Call it the age of the meme bond.
“Bonds were something your grandma gave you,” McHugh said. “I just don’t think people know that you can be a degenerate bond gambler.”
The Bed Bath & Beyond bet is the same one many hedge funds make when they invest in the bonds of distressed companies. Buy at a discount now and hope to get paid back in full later. That is, if the company doesn’t go bust in between, in which case they’ll fight it out in bankruptcy court.
But these are regular people. And they’re congregating in the same places where meme-stock traders boast about their diamond hands and cheer unlikely protagonists like GameStop Corp. and AMC Entertainment Holdings Inc. Last year, they learned how much power they had, sending the stocks of struggling companies surging by 10-fold or more, and creating short-squeezes so epic that they destroyed Gabe Plotkin’s $7.8 billion hedge fund, Melvin Capital Management.
While traders haven’t ditched stocks and crypto entirely, smaller investors are looking for assets that match the new market reality, where steep inflation, rising interest rates and fears of recession compete for attention. They want risk with at least a glimmer of a guarantee.
This is an environment where people like Jennifer Lammer go viral on YouTube. Junk corporate debt may be exciting for the Reddit crowd, but US government bonds are also gaining fans. Lammer, a former banker and current financial adviser in Westchester County, New York, has attracted nearly 1.5 million views teaching people about this year’s retail-investor favorite, the Series I savings bond.
Designed to protect investors’ savings from inflation, I bonds surged in popularity when their interest rate hit a record 9.62% in May. A mad scramble to buy the bonds before the rate reset on Nov. 1 led to nearly $7 billion of sales in the month of October alone — about seven times more than were sold in all of 2021.
For Lammer, the online fame started when she made a video for her clients explaining how to buy I bonds. It’s now attracted nearly 150,000 views and she has since created dozens of other bond videos, with titles such as “I Bonds for Kids” and “How to 10.5x your I Bond Returns.”
Prior to this year, the only time anyone really struck up a conversation about bonds with Lammer was back in the late ‘90s when she was working on a high-yield debt deal for the Florida Panthers hockey team as a banker at Bear Stearns.
“Now I get probably several hundred messages a day on bonds,” she said.
These bond neophytes are confronting the first bear market in a generation for global bonds, battered by central banks around the world raising interest rates to combat inflation, pushing yields higher in the process.
But today’s bond traders see pockets of opportunity. Jake Freeman, 20, demonstrated this summer that meme stocks could still generate astonishing returns when he made $110 million betting on Bed Bath & Beyond. The college student had acquired nearly 5 million shares for less than $5.50 apiece in July and sold them as the stock surged above $27 the following month.
Freeman also took advantage of his stake in Bed Bath & Beyond to send the company some suggestions on how to restructure its debt. He says he still holds about $29,000 of its 2024 bonds, whose yields have reached a whopping 100%.
“I think more and more people are starting to say, ‘Oh, what if we take this the next step further, which is the bond,’” he said.
‘Slow and Boring’
There’s a growing sense that the worst for bonds may be over, as the Federal Reserve gets a handle on inflation and becomes less aggressive with its interest rate hikes. Global bonds rebounded in November, adding a record $2.8 trillion in market value.
That’s led to an influx of interest from individual investors — the number of trades on Interactive Brokers’ retail-focused bond platform tripled in the third quarter to as many as 3,000 per day.
Compared to the stock market, bonds can be harder for retail traders to dabble in. Yes, everyday investors have long bought blue-chip corporate debt and government savings bonds, particularly at times when interest rates were high. But the junk bond market, and especially distressed debt, is dominated by institutional players and can be opaque and illiquid. Plus, if a company goes bankrupt, retail investors holding bonds have to fight it out in court against other creditors, potentially pitting themselves against banks and vulture investors to get their money back.
There are easier ways to get exposure. Bond ETFs, which bundle several securities into a single fund, are easy to buy and sell on platforms like Vanguard and Charles Schwab. The universe of bond ETFs took in $27 billion in October alone, its fifth-best month of inflows ever, followed by another $27 billion in November, according to data from State Street. Meanwhile, high-yield funds attracted $7 billion in October, the second largest monthly intake on record.
Traders have also poured $116 billion into government bond ETFs so far in 2022, by far the best year on record, according to data compiled by Bloomberg.
For the most part, retail bond investors present a very different vibe than the rocket ship emoji-loving world of WallStreetBets. Members of McHugh’s Reddit bond channel are more into information, and less about manipulation.
“People are generally very professional,” he said, noting that the most vociferous recent complaint was about the government’s clunky website for buying bonds. “The worst thing that anyone has posted recently is, ‘TreasuryDirect is so effing awful.’ Which is a very fair criticism.”
Of course, if the meme-stock craze is any indication, not all Redditors will be content with bonds.
A recent post on WallStreetBets turned into a debate about whether crypto exchange Coinbase Global Inc.’s 2031 bonds — trading around 53 cents on the dollar — are a good bet. The conclusion from one user? “Bonds are slow and boring.”
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