Slow Economy, Low Interest Rates, And Improved Balance Sheets May Mean Junk Bonds Are Still Well Positioned

Tuesday, July 10, 2012 09:02
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Slow Economy, Low Interest Rates, And Improved Balance Sheets May Mean Junk Bonds Are Still Well Positioned

Tags: bonds | investing | investing for income | markets

One reason the equities markets may be soft of late is the increasingly attractive yield of junk bonds. Yields as high as 6.5% over Treasuries are pretty nice places for money to be and they are indeed attracting more funds from investors.

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The historic comparison of junk bond yields is to the fixed income markets. But the stock markets are viewed as holding more risk currently than the improving balance sheets of distressed corporations. Junk bond yields tend to expand during times of economic distress and contract as economies grow stronger.
 
So there’s a sweet spot currently because conditions are right for this yield contraction as well as the fact that corporations have eliminated a great deal of debt, allaying much of the risk that was previously present.
 
Junk bond yields in January of 2007 were 2.5% above Treasuries. That’s a four point differential that should increase bond values as the US economy improves. At the rate that improvement is currently occurring and with the Fed committed to keeping interest rates near zero through 2014, your clients may be able to take advantage of the junk bond boon for the near future.

 

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