Payoffs rise, along with risks
Q: Should I toss my junk bonds?
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.