UNK -- Clear Leader in High Yield Bonds

05/03/2011 0 comments

 

Bonds are one of the major fundamentals of any investment portfolio. Due to the recent global crisis bonds have been under pressure and finding the right mix of fixed income is a key component to a successful portfolio. Bonds are debt securities issued by organizations to raise capital for various purposes. The bond holder lends money to the entity that issues it, in return the lender (the issuer) agrees to pay interest and to return the face value (principal) when the bond matures or at a specified date in the future known (maturity date or call date).

 

High-yield bonds are issued by organizations that do not qualify for “investment-grade” ratings by one of the leading credit rating agencies—Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings. Since the high yield bonds do not qualify for the investment grade rating, high yield bonds interest rates are kept high than to induce the investor to invest.

 

Please find below the graph of returns of US high yield bonds.

The graph clearly shows the UNK is the winner with 8.70% returns in the three years. The runner up is HYG. The one year returns are also very good of both the above mentioned ETF’s. Please find below the graph of volumes.

 



UNK represents 66% of the average market volumes making it the leader in terms of yields and volumes in this segment. The higher returns are in line with the characteristics of High yield bond. All the above mentioned bonds one year returns are above 10% making it a good streams of fixed income.

High-yield bonds do not correlate exactly with either investment-grade bonds or stocks. Because their yields are higher than investment-grade bonds, they're less vulnerable to interest rate shifts, especially at lower levels of credit

The high yield bond has its own risk as they are below the investment grade credit rating. Investors must consider higher volatility and the risk of default. Default rates are around 2% (as of Aug 2005), which is near historic lows.

The high yield bond has its pros and cons but careful deployment of high yield bonds can provide reasonable returns and an effective hedge in the event of the volatility.

 

Symbols: HYG, UNK, PHB

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.



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