Newspaper article St Louis Post-Dispatch (MO)

Think `Junk' When Interest Rates Rise

Newspaper article St Louis Post-Dispatch (MO)

Think `Junk' When Interest Rates Rise

Article excerpt

Well, they're not exactly "junk." But they're not risk-free, either.

Junk is the uncomplimentary term for high-yield bonds, debt obligations with a less-than-stellar credit rating that's most likely BB or lower.

These bonds typically are issued by financially troubled companies lacking long-term earnings records and credit strength. A higher rate compensates investors for potential dangers. While junk bonds still conjure up dark images of their defrocked high priest, Michael Milken, they've become respectable and mainstream. Most investment firms now offer them. Buoyed by a strong, stable economy, the value of high-yield bonds has outstripped conventional taxable bonds, their credit quality has improved, their default rate is down, and they encompass more industries. Since junk bond success is less directly tied to interest-rate swings than is the case with other bonds, holders don't fret as much about potential rate hikes by the Federal Reserve. Junk bonds attract average Americans seeking to diversify in uncertain times. All of which makes sense, but just be careful: Federal Reserve Chairman Alan Greenspan, after chiding the stock market, noted an overly optimistic attitude "has become especially evident in quality spreads on high-yield corporate bonds." After all, the junk bond market rode high in the late 1980s, but was hammered in 1990 when it overextended itself. High-yield prices have risen this year, while investors are being paid record-low premiums for potential risk. The differential between junk bonds and Treasuries has slipped to 3 percent from its five-year average of nearly 4 percent, as if any dangers attached to junk issues have evaporated. Always remember why you buy high-yields in the first place. "The most important reason to invest in high-yield bonds is diversification without sacrificing return," declared Martin Fridson, chief high-yield strategist for Merrill Lynch & Co. …

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