Buy when the cannons are roaring.

I'm not a big fan of low quality bonds, otherwise known as junk bonds. When I put money in bonds (via mutual funds), I do it for safety, so I'm usually in Treasuries or something similar, which have a very high degree of credit safety. I can't remember the last time I owned a junk bond fund, actually.

So with the housing thing really starting to come home to roost, with the whole mortgage/CDO market seemingly on the brink of disaster (or already in, according to some), and with credit spreads widening and the whiff of recession in the air... I decided it's time to start dipping into the junk bond waters.

I picked a fund (Pimco High Yield), and I'm dollar cost averaging in every month, probably for the next 12-18 months. At the same time, when I hear really, really awful economic/credit market news, I'll be throwing a little bit more in via extra payments.

The logic, basically:

Try to buy what everybody else is running from. But do so carefully.

Bloomberg: H&R Block May Close Loan Business as Losses Double.

Quote:

``The loan-originations market is in the midst of the most severe dislocation it has seen in years, maybe the most severe since the 1930s,'' Chief Executive Officer Mark Ernst said on a conference call with analysts. He said the credit markets are in ``turmoil.''

Bloomberg: U.S. Stock-Index Futures Retreat; Goldman, Merrill Decline.

Quote:

``We don't have a perfect idea of how deep or widespread the subprime issue will be,'' said John Forelli, who helps oversee $7 billion at Independence Investment LLC in Boston. ``Investment banks are caught in the crosshairs of this financial crisis.''

Update 08/31/07:

Reuters: Moody's president sees unprecedented illiquidity.

Quotes:

The credit market is experiencing an unprecedented loss of confidence due to the lack of transparency over where exposures lie rather than underlying credit quality problems, Moody's Investors Service President Brian Clarkson said on Thursday.

"I've been in the marketplace for 20 years ... what we're experiencing is an extreme lack of confidence and lack of liquidity. I have never seen this before," Clarkson told Reuters in an interview. "A lot of it has to do with transparency: it's not clear who owns what."

There are also questions over valuations of illiquid securities, he said, although not necessarily from a credit standpoint. Some structured vehicles -- such as the Cheyne Finance fund run by British hedge fund Cheyne Capital Management -- have been forced to sell assets due to losses even though the securities they hold have not been downgraded.

"It's not that a lot of the things people are holding aren't money good, they are. If you hold them to maturity they will pay interest and principal on a timely basis."