Investors are flocking to junk
as they work to bolster their portfolios against
Companies with dubious
ratings issue junk bonds, which are also more affectionately known
bonds. Such borrowers pay elevated
because of the inherent
they pose, and they are a gamble for investors, particularly amid
ongoing unease in the global economic landscape.
Still, high-yield bonds have the potential to earn their owners a
significant payback, but they are also subject to the whims of
market conditions. The higher the
's yield, the bigger the potential payback - though junk bonds
associated with the riskiest companies carry the largest possible
At the height of the financial crisis, junk bond yields were 22.3
percentage points above Treasuries. That figure has fallen over the
past four years, but they are still delivering yields nearly 5
percentage points higher than government-backed securities. Whether
investors should consider strategically adding junk bonds to their
portfolios depends on how much risk they are comfortable taking on.
Retail investors have shown their appetite for risk is growing, as
they have poured more than $11.8 billion in junk bond
this year, according to data from the research firm Lipper.
managers are also ramping up their
purchases of junk bonds
, The Wall Street Journal reports.
The junk bond market is only beginning to heat up, but a growing
number of investors are eyeing the 4.74 percent
they have returned thus far this year as a way to diversify their
holdings. That yield is still less than the 8.6 percent uptick
logged by the Standard & Poor's 500-
index since the onset of 2012, but junk bonds returned 4.98 percent
to investors last year while the S&P 500 delivered only 2.1
Bullish investors such as MFS Investment
chief investment strategist Jim Swanson contend that junk bonds are
poised to rise.
"High yield isn't near its lowest spread and is still above its
average," he told the WSJ. "All that has to happen for us to make
money is for spreads to get tighter."
Junk bonds have gained in popularity as an investment tool because
companies have had the past three years to restructure their
and overhaul their business models amid record low interest rates.
While equities are still returning higher yields since the
beginning of this year, some investors and mutual funds have
increased their high-yield holdings in an effort to prepare for
potential shocks that could hit global stock exchanges.