During previous decades, investors associated high yield bond funds with investment scams and unscrupulous bankers. Today, many investors still opt for the relative safety of investment grade securities like United States Treasurys. But interest rates on all high grade bonds have been gradually declining for many years. In 2012, they've reached record lows, making it very challenging to put together a good bond portfolio for retirement. Now could be a good time to reconsider high yield bonds, because it's among the only areas that offers good interest rates in today's markets.
As a fixed income investor, you have a numerous possible options. First, you could buy high quality bonds, often from governments. Second, you could invest in high grade corporate debt. Doing this would be still relatively safe. As a matter of fact, some corporations are currently paying lower yields than many sovereign (government) bonds. Finally, you can invest some of your money in high yield bonds.
Investing directly in individual high yield securities is not a practical approach for most individual investors. The bond market is reigned over by financial pros, who spend their days pouring over corporate financials and assembling portfolios with maximum returns and the lowest volatility. Luckily, there are many excellent high yield bond funds and ETFs that you can buy. They are managed by professional portfolio managers, and provide the great benefit of diversification. For instance, two of the most widely used high yield bond ETFs (with ticker symbols JNK and HYG) currently hold 223 and 446 different bonds in their fund respectively. Likewise for a lot of of the available high yield bond mutual funds: they hold a large selection of individual securities, managing some of the risk of default and investment losses. You can go to Morningstar, Yahoo Finance or other popular investment websites and easily find good high yield mutual funds.
You need to be somewhat mindful about when to invest in high yield. One approach is to track the so-called interest "spread" between high yield and high grade securities. High yield bonds often yield between 4 and 6 percent more than safer bonds. During economic crises, this spread rises, as investors sell speculative bonds and buy government and other less risky bonds. Companies selling high yield bonds then have to pay a high rate of interest to get investors to buy their bonds, so the spread may be six percent or sometimes even higher. This is frequently a good time to invest in high yield bonds. For example, during the global financial meltdown in 2008 and 2009, the high yield spread rose to upwards of seven percent over U.S. Treasuries. High yield bonds have gained a lot in value since then.
It's also advisable to be aware that high yield bond prices often decline during economic recessions. In other words, they behave like stocks. This implies potential investment losses.
Don't let the bad name of high yield bonds prevent you from seriously considering them as a valuable source of income for your retirement portfolio. But bear in mind that high yield bonds are a lot riskier than many higher grade fixed income securities. With the added yield comes increased risk -- in investing, there's no free lunch.
As a fixed income investor, you have a numerous possible options. First, you could buy high quality bonds, often from governments. Second, you could invest in high grade corporate debt. Doing this would be still relatively safe. As a matter of fact, some corporations are currently paying lower yields than many sovereign (government) bonds. Finally, you can invest some of your money in high yield bonds.
Investing directly in individual high yield securities is not a practical approach for most individual investors. The bond market is reigned over by financial pros, who spend their days pouring over corporate financials and assembling portfolios with maximum returns and the lowest volatility. Luckily, there are many excellent high yield bond funds and ETFs that you can buy. They are managed by professional portfolio managers, and provide the great benefit of diversification. For instance, two of the most widely used high yield bond ETFs (with ticker symbols JNK and HYG) currently hold 223 and 446 different bonds in their fund respectively. Likewise for a lot of of the available high yield bond mutual funds: they hold a large selection of individual securities, managing some of the risk of default and investment losses. You can go to Morningstar, Yahoo Finance or other popular investment websites and easily find good high yield mutual funds.
You need to be somewhat mindful about when to invest in high yield. One approach is to track the so-called interest "spread" between high yield and high grade securities. High yield bonds often yield between 4 and 6 percent more than safer bonds. During economic crises, this spread rises, as investors sell speculative bonds and buy government and other less risky bonds. Companies selling high yield bonds then have to pay a high rate of interest to get investors to buy their bonds, so the spread may be six percent or sometimes even higher. This is frequently a good time to invest in high yield bonds. For example, during the global financial meltdown in 2008 and 2009, the high yield spread rose to upwards of seven percent over U.S. Treasuries. High yield bonds have gained a lot in value since then.
It's also advisable to be aware that high yield bond prices often decline during economic recessions. In other words, they behave like stocks. This implies potential investment losses.
Don't let the bad name of high yield bonds prevent you from seriously considering them as a valuable source of income for your retirement portfolio. But bear in mind that high yield bonds are a lot riskier than many higher grade fixed income securities. With the added yield comes increased risk -- in investing, there's no free lunch.
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High yield bond funds have attracted a lot of investors recently, partly due to the current low interest rate environment.. This article, Investing in high yield bond funds is available for free reprint.
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