you see why high-yield bonds are called junk.
can be sloppy and unreliable — sometimes the stinkiest
garbage from the junkyard of the bond market. And they
can stink up your investments, too. They have lost about
8 percent this year.
bonds are included in the type of funds you might own.
They are sold to investors by weak companies that need
cash. These companies can’t get loans from more
cautious lenders who are afraid of not getting paid
back. So the weaklings turn to investors willing to take
chances. Higher interest rates, or high yields, are the
bait offered to investors to take chances they otherwise
the past few years, cautious people, such as retirees,
let down their guard against junk, because they were
getting paid almost no interest on safe bonds or CDs.
They bought high-yield bond funds and high-yield
exchange traded funds such as the iShares iBoxx High
Yield and SPDR Barclays High Yield. Some plain vanilla
bond funds are also stuffed with junk. Regular bond fund
managers added junk to their funds so you’d be happier
with larger returns than you were getting on safer
there’s been a scare in the market. Many high-yield
bonds have been issued by companies in the energy
business, and they are in distress as oil prices plunge.
Savvy investors have wondered if many of those companies
will go bankrupt and infect the entire high-yield bond
market. And as scared investors have tried to sell these
bonds, they’ve had trouble finding buyers. As a
result, the sellers have had to drop the price so they
could get buyers. That’s set off a downward spiral of
intensified this month when a particularly risky
high-yield bond fund, the Third Avenue Focused Credit
Fund, collapsed and wouldn’t let investors pull their
money out. The action, the fund managers said, was to
try to stabilize the fund so investors wouldn’t end up
blocking people from leaving was unnerving. People
invest in mutual funds so they can get their money back
whenever they want. Analysts started to wonder aloud in
interviews whether Third Avenue Focused Credit Fund was
the canary in the coal mine for junk bond risks. Some
made comparisons to Bear Stearns and Lehman Brothers in
the financial crisis in 2008.
of us are skittish because so many of us missed the
subprime blowup," said Craig Elders, fixed income
analyst for Robert W. Baird. Yet, the markets have
calmed in recent days.
no large fund or hedge fund blows up during the next
couple of weeks, it should be OK," he said.
some analysts are talking about deals in the market
since fear and selling lately have caused prices to fall
sharply. In August, yields shot up because of worries
about a slowing global economy and risks of bankruptcy
among energy companies. Then, high-yield bonds on
average were yielding about 7.5 percent, but now are
about 8.7 percent.
a huge swing," Elders said. It doesn’t mean
investors aren’t taking risks, but when yields are
that high individuals are getting compensated for taking
the risks. The risk will be worth it if there isn’t a
panic set off by more collapsing funds or by bankrupt
energy companies unable to pay back junk bond investors.
such as Sarah Bush of Morningstar are pointing out that
most high-yield mutual funds have far less risky
portfolios than Third Avenue Focused. The fund, she
said, invested heavily in extremely distressed names.
worried about risks, she said, can check the contents of
their funds. If they see bonds rated CCC or less, that
shows their fund is taking on a lot of risk. In the Bank
of America Merrill US High Yield Master Index, 13
percent of bonds are CCC or worse. Exceeding that
percentage is very risky. Staying with bonds rated in
the Bs would be safer. Ratings of A to AAA are safest.
check the yield on your fund. The median 12-month yield
for the high yield category is 5.6 percent, said Bush.
If your fund is yielding more than that, you are taking
on significant risks.
analyst Christine Benz notes that some institutions,
like pension funds, don’t hold any high-yield bonds.
They argue that high-yield bonds — which act more like
stocks than bonds — don’t add anything to