Pay­offs rise, along with risks

Q: Should I toss my junk bonds?

USA TODAY US Edition - - MONEY -

A: Junk bonds have been trea­sure for in­vestors will­ing to take a gam­ble. Some in­vest­ment pros, though, are start­ing to worry this as­set class could get in­cin­er­ated.

The iShares iBoxx$ High Yield Cor­po­rate Bond ex­change-traded fund (HYG) has gen­er­ated eq­uity-beat­ing re­turns this year. The fund, which owns a bas­ket of junk bonds, is up by nearly 7% this year on price ap­pre­ci­a­tion alone. That doesn’t even in­clude the 5.5% div­i­dend yield that at­tracted so many in­vestors in the first place.

The Stan­dard & Poor’s 500, in com­par­i­son, is also up 5.6% this year but yields just about 2%.

Junk bonds have turned into one of the only places for in­vestors hun­gry for de­cent in­come to turn to as in­ter­est rates stay per­sis­tently low. Junk bonds still aren’t over­val­ued, Brian Rehling, co-head of global fixed in­come strat­egy at Wells Fargo In­vest­ment In­sti­tute, says in a note to clients.

But while junk bonds have been pay­ing off for in­vestors, the risks are ris­ing. Rehling says junk bonds are still at­trac­tive, but in­vestors should be pre­pared if con­di­tions change.

If the spread be­tween junk and Trea­suries gets closer to 4 per­cent­age points, that could be a sign junk is over­priced.

Matt Krantz mkrantz@us­ato­ USA TO­DAY

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