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A column by Marilyn Cohen in latest edition of Forbes makes the case that it may be a good time to start looking at high yield bond funds. She says that pension fund managers are starting to put more money into junk bonds and that the cash influx could drive up prices.

Of course, these things aren't exactly CDs. The default rate on junk bonds, she says, is currently 5.2%. (Does anyone on this board know how this default rate compares to those of investment grade corporate bonds and high yield munis?)

Although the yields are starting to look attractive, I'm not ready to get into a high yield fund myself. At least not until the market stabilizes some. Right now there's still too much downside risk for my tastes.

www.forbes.com/forbes/2000/1113/6613390a.html


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You may reasonably assume that any bond fund labelled as high yield is a junk bond fund. A high yield muny fund probably invests in lower rated bonds, and may have similar risks of failure.

Investing in bond funds right now--as always--requires a guess about the future of the economy and interest rates. It can be a great time to lock in high interest rates (although buying the bonds themselves is a better way to do this), especially if you think interest rates are near their peak and will soon begin to decline. If however, the Fed forces the economy into recession, business failures will increase, and junk bonds are the ones at greatest risk.

Junk bond investing can be OK, but only for a portion of your assets--probably no more than 20 to 30%. The downside risks are there and they are substantial. The jumbo sized rewards can be there too, but you must make the right choices at the right time to succeed.

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((((((Junk bond investing can be OK, but only for a portion of your assets--probably no more than 20 to 30%. The downside risks are there and they are substantial. The jumbo sized rewards can be there too, but you must make the right choices at the right time to succeed.)))))

5% of assets in a junk bond fund is about all I can take, given the risks. The high-yield fund I'm looking at is Vanguard High Yield Corporate Bond Fund, which seems to be a good choice in terms of risk/return. The fund has a large number of holdings, 10% yield, .2% expense ratio, and invests in higher-rated bonds than comparable junk bond funds do.
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TIAA/CREF is a investment company that formerly had participants that were in research and education. However in 1997 the "lost" their no-profit status and their products are available to everyone. I have been with them for years and there funds are excellent. The reason I am replying as I noted that a 2% expense ratio seems to be acceptable to you. TIAA/CREF has a "high yield" bond fund however, their average expense ratio is 0.31%. Returns come an go, but expenses never leave. A 1.7% difference will make a considerable difference over time.

Good Luck
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< It can be a great time to lock in high interest rates (although buying the bonds themselves is a better way
to do this)>

Junk bonds are not the place to be trying to lock in returns on falling interest rates. They are a hybrid investment. They are bonds, but react more like stocks. As a company's prospects improve, the bond prices go up because they are more likely to cover the interest. Also, they can benefit from being upgraded by a rating agency as the firm succeeds in carrying out its business plan.

Also, if there is ever a place to argue for investing in a fund it is with junk bonds. The last thing you want to do with a fool's limited capital is tie it up in a one or two junk bonds. Too much risk. Better to buy a fund and be spread over 50 or 100 bonds.
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