Tags: Junk | bonds | risk | investment-grade

WSJ: Investors Again Finding Value in ‘Junk’ Bonds

By    |   Tuesday, 28 Feb 2012 01:38 PM

As investors have embraced risk in financial markets since stocks hit their early October lows, many have jumped into high-yield bonds, more commonly known as "junk" bonds.

Income-oriented investors are frustrated by the paltry yields available on Treasurys and investment-grade corporate bonds. With the U.S. economy gradually rebounding, some investors see little risk of default among companies issuing junk bonds.

Retail investors have thrown $11.8 billion into junk-bond mutual funds this year, compared with $4.8 billion for stock funds, and $9.9 billion for investment-grade bond funds, according to research firm Lipper, The Wall Street Journal reports.

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To be sure, the payoff has been mild so far. In 2011 junk bonds produced a return of 4.98 percent, badly lagging the 8.1 percent return on investment-grade corporate bonds.

So far this year, junk bond returns have averaged 4.74 percent, far behind the Standard & Poor’s 500 Index at 8.6 percent.

Junk bond bulls say that creates a scenario for strong gains ahead. "All that has to happen for us to make money is for spreads to get tighter," Jim Swanson, chief investment strategist at MFS Investment Management, tells The Journal.

It’s difficult to know what to make out of this situation.

Clearly junk bonds represent an asset class for income investors to consider, given near record-low interest rates. But maybe it’s the smart money that is staying out junk bonds now, which could be an ominous sign for the future.

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Tuesday, 28 Feb 2012 01:38 PM
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