High-yield, or junk, bonds soared last year, and many experts anticipate the rally will continue this year.
But Harvard economist Ken Rogoff isn’t so sure.
Sustained low interest rates may well spark a bubble in the junk bond market, the former IMF chief economist told Bloomberg.
“I care when there’s massive borrowing, especially short-term borrowing, that’s fueling asset-price rising. That I think is a big cause for concern.”
Junk bonds returned 57.5 percent last year, and many junk bond fund managers see more gains ahead.
They point out that the yield premiums for junk bonds over Treasuries are still almost a full percentage point higher than the median of the past 13 years.
“I think there’s good value,” Kathleen Gaffney, co-manager of the Loomis Sayles Bond Fund, told Bloomberg.
“High-yield debt also gives you a good cushion next year when everyone’s a little bit on tenterhooks regarding interest rates.”
But some agree with Rogoff.
“The market has to go down at some point, and these managers will be compelled to sell to meet redemptions,” Michael Tennenbaum of Tennenbaum Capital Partners told Bloomberg.
Prices may “cascade downward,” he said.
Weiss Research analyst Mike Larson sees the entire bond market in danger thanks to the exploding U.S. debt burden.
"The U.S. is overspending, over-borrowing, has accumulated large deficits and has no plans to get things under control,” he told The Huffington Post.
We're doing the same thing that drove Greece over the edge."
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