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Investment Research Since 1978

Record Junk Bond Yields

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Low interest rates have understandably pushed investors into junk bonds. More money has flowed into junk bonds this quarter than any quarter since 1980. The average yield is 7.98%, another record—the lowest since 1980. Investors can blame the Fed’s zero-rate policy, thanks to which a 10-year Treasury yields 2.18%, for pushing them into junk bonds.

While they’re being pushed into lower-quality bonds, investors are also being forced to look toward longer-maturity bonds to pick up yield. But wait until interest rates go up. The word to remember is duration. A bond’s duration is an approximation of the percentage decline in its value for every 1% increase in interest rates. The smaller the duration, the less sensitive a bond is, and therefore the less risky in terms of interest rate fluctuations. If rates increase by 1%, the price of a bond with a duration of 10 will fall by about 10%.

Junk bonds should play a role in your bond holdings. But be choosy when it comes to issuers, or hire an advisor to guide you through the minefield.

 

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.