You’ve Been Thinking About Junk Bonds All Wrong

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You've Been Thinking About Junk Bonds All Wrong

(New York)

One of the biggest arguments of the junk bond market is this: one needs to be careful of junk bond indexes because they automatically skew investors to the companies with the most debt, making portfolios inherently more risky. The argument has a seemingly sound logic which is similar to the "skew" often referred to in equity ETFs. However, the reality is the complete opposite, as the companies with the most debt actually tend to be larger and have more conservative levels of leverage. The larger companies with the highest total debt in the high yield market tend to have lower default rates, so there is actually no correlative relationship between more debt and higher risk. The analysis is from S&P Global Market Intelligence.

FINSUM : This is very useful analysis, because the more debt = more risk fallacy is an easy-to-fall-into mental trap.

  • bonds
  • junk bonds
  • high yield
  • credit
  • risk

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Bonds

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