High-Yield Bonds Are Shining Brighter Than Ever!
by Steve McDonald, Contributing Editor, Investment U
Wednesday, October 5, 2011
The recent sell-off in stocks has driven high-yield bond prices back to reality after a long run-up in price.
We’re now returning to normal high-yield standards of about nine percent, and many issues are paying as much as 15 to 17 percent.
Greg Hopper, the Manager of the Artio Global High Income Fund, says that high-yield bonds are priced at economic Armageddon levels, already having priced in the worst-case scenario. But default rates, according to Moody’s, are only 1.8 to 2.1 percent – well below the 80-year average, and that’s not expected to change.
Hopper likes opportunities in many European corporate bonds, which he says are the babies that have been thrown out with the bath water. Great companies that have great cash flow and growth are being punished for the underperformance of their governments.
Martin Fridson, a credit market analyst for BNP Paribas, says that the high-yield market is paying twice what you should expect for the risk level associated with the current low default rate.
The bottom line: High-yield bonds right now have a very fat return that can easily beat the stock market. Returns of nine percent and above are nothing to sneeze at in this market.
Good investing,
Steve McDonald
Article by Investment U