Investors have piled into high-yield corporate bonds this year, drawn by healthy returns. The typical high-yield bond offers a yield of 6.8 percent, compared with 0.8 percent for U.S. government bonds with similar maturities.
Demand for high-yield bonds, better known as junk bonds, has pushed a widely used market index up 13 percent. That's nearly as good as the 14 percent gain of the Standard & Poor's 500 index, including dividends.
It's an impressive run, but even many long-time boosters are warning that it won't last. High-yield bonds are essentially loans to companies with the worst credit scores, the very businesses most vulnerable to going under when the economy slows down. That's how they picked up the name "junk." So when trouble is brewing, traders often treat junk bonds like stocks: They sell.
Investors have done that over the past month as they fretted about the "fiscal cliff" of tax increases and government spending cuts set to kick in at the start of the new year.
The junk index dropped nearly 2 percent through Nov. 16. That may not seem like much, but for the normally placid market, it's just shy of the worst sell-off this year.
And Martin Fridson, CEO of Fridson Vision, a financial research firm, says junk bonds still look expensive. The average bond sells for more than the principal amount that the purchaser is owed when the bond matures. That means, if you buy now you're not guaranteed to get all of your money back.Associated Press