Question:
What is your take on high-yielding bond funds? Also, are there any you prefer?
Thanks, Gene
Answer:
Gene, I assume you refer to corporate bonds rated below investment grades in your question. If so, read the following …
High yield is a nice way of saying “junk” when talking about bonds. These bonds are issued by firms who must pay a higher interest rate when raising capital than those companies that issue bonds that qualify as investment grade. Those higher interest rates are attractive to investors and lately demand for high yield bonds has led to a very nice rally in junk bond funds.
In the above quote, risk is implied. My take on these bonds is that they are risky, but should that stop you from investing in them?
Sure junk bonds are risky but are they riskier than “growth” stocks? Because most stocks pay a nominal or zero dividend, the only way investors can profit is if future buyers bid up prices. In order for that to happen, expectations for growth must increase in the future.
One question you need to answer is: will the current economic recovery provide enough growth to push stocks higher relative to the yield on junk bonds. Another is: will the current economic recovery open the door to liquidity/credit more than it is now? If not, repaying, selling, or transferring debt could become a concern for some of the corporations offering these high-yield bonds.
I believe we are in economic recovery, but it might take some time to get back to full growth in all areas. I could be wrong, though. If another serious economic shock occurs then these funds could take a serious hit. Then again, if we have another economic shock, stocks won’t fare well either. Trading is gambling, and this choice clearly points this out. My advice: be careful.
As to my preferences, I have none. But I will say that you are correct to check out reputable mutual funds that offer these investments. Do your homework and you just might make out quite nicely. If you go in blind, you just might regret it …
Trade in the day; invest in your life …
