Lay Off The High-Yield Bonds For NowFebruary 29th, 2012 by David Waring
(February 2012) Stocks aren’t the only things that have been on fire since early October. Non-investment grade bonds, also known as high-yield or junk bonds, have likewise been performing strongly. Despite the fact that, depending on which part of the Treasury curve you are focusing, benchmark Treasury prices (TLT) are either down or flat since the stock market October lows, high-yield debt prices, as a collective whole, are up significantly. Three high-yield exchange-traded funds, HYG, JNK, and PHB, are up 17.88%, 17.16%, and 10.76% respectively, excluding distributions, since their October lows.
The large price appreciation seen in these three ETFs is due to the spreads between high-yield debt and benchmark Treasuries contracting. Despite the fact that yields have risen on some parts of the Treasury curve since the October lows, high-yield spreads have managed to contract at rates far faster than Treasury yields rose, thereby helping to boost prices for high-yield bonds. At the moment, all three high-yield ETFs are sitting at or close to their highs reached since the March 2009 lows.
It is true that in recent weeks investment flows into high-yield funds have been quite strong. However, as an investor in individual bonds and someone who regularly searches the bond market for great investments from a risk/reward profile, I would like to note the difficulty I am having in recent days finding high-yield or investment grade bonds for that matter with what I consider adequate risk/reward profiles.
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I am an investor/trader with nearly nine years experience in the financial world. I have experience investing in and trading equities, options, and a variety of fixed income and alternative investment products. I also write for SeekingAlpha.com.
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