The Investment U E-Letter: Issue # 465
Monday, August 29, 2005 Are High Yield Bonds Too Good to Be True Right Now?
By Dr. Steve Sjuggerud, Chairman, Investment U
Now that stocks are expensive, and real estate price tags are too big (according to Alan Greenspan), is it time to invest in high yield bonds? In short, the answer is no… Bonds of companies that seem to have any risk at all are a bad deal right now. In particular, I suggest you avoid the temptation to invest in junk bonds (also known as "high yield" bonds), and emerging market bonds. Why? A lot of investors are attracted to high yield bond funds right now, with yields in the neighborhood of 6.5%. But the risks these funds must take with your money to earn those attractive-looking yields are just not worth it. With an increasing amount of borrower defaults and looming bankruptcies, you can lose good money here… Yes, You Can Lose Money in Bonds Here's what I mean: High yield bonds actually lost nearly 10% in 1990… and then roared back for a few years. They lost money again in 1994, and 2000 and 2002. You'd have lost money in four out of the last 15 years. The last two years have been good, and investors are looking for new places to put their money. But after a big run, high yield bonds are not the place to invest. Take a look in the chart below: Total returns on the Lehman High Yield Bond Index, 1990-2004 1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004 | -9.59%
46.19%
15.75%
17.12%
-1.03%
19.17%
11.35%
12.76%
1.87%
2.39%
-5.86%
5.28%
-1.41%
28.97%
11.13% |
The Dean of High Yield Speaks Martin Fridson is widely considered "the dean of high yield." He's done more homework and made more good calls than anyone in this field in the last 15 years. In today's Barron's, Marty issues this major warning about his specialty, risky bonds: "An already-risky segment of the investing landscape [high yield bonds] is sure to get even riskier. That should be apparent over the next few years, when the bankruptcy dockets almost certainly will be teeming with activity. The credit quality of newly issued highyield bonds nosedived in the undiscriminating investment environment of 2003-2004. Typically, defaults and bankruptcies surge a few years after such episodes." Marty says a lot of money has flowed into these risky assets in recent years. And his homework shows that after money flows in indiscriminately, people lose money. We're at that time now. Don't get excited about attractive, high yield bond funds and emerging market bond funds. The downside risk is much greater than the upside potential at this point. And if you're overloaded with these, lighten your load at the current high prices. Good investing, Steve Related Articles: Back to Archive | 
