Appetite for US High Yield Bonds Remains High as Yields Tighten

05/17/2011 0 comments

These days, good investor look for safe and consistent returns. Global investments can change quickly with only one piece of bad news. There are various way to protect your investments; diversification being one of the chief among them. Bonds forms an important part of an investment strategy these days due to consistent returns and lack of volatility.

 

Bonds are debt securities issued by organizations to raise capital. 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.

U.S. High Yield Bonds

05/13/2011

Description Symbol 1 Yr 3 Yr 5 Yr Avg. Volume(K) 1 Yr Sharpe
SPDR Barclays Capital High Yield JNK 17.3% 8.39% NA 2,776 230.06%
PowerShares Fundamental High Yield PHB 15.72% 0.95% NA 295 262.69%
iShares iBoxx $ High Yield Corp HYG 14.83% 7.02% NA 1,182 225.38%

 

 

The table clearly shows the JNK is the winner with 8.39% 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.

JNK represents 65% of the average market volume 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.

 

Symbol: 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.

 



comments 0   Share/Bookmark
Register for FREE No Credit Card Required
Or Start FREE 30-day trial now >>

Members enjoy Free features

  • Customize and follow a diversified strategic allocation portfolio for your 401k, IRA and brokerage investments within minutes
  • Receive monthly or quarterly re-balance emails
  • Enter funds and percentages in your portfolio, see its historical performance and receive ongoing rebalance emails
  • Real time fund ranking and selection for your plans
  • Quality retirement investing newsletter emails
  • Fund ranking and selection for your plans

Tens of thousands of users have signed up!

Join Now (Free)
No Credit Card Required

User names can only consist of alphabetic and
numeric characters.(eg: 0-9a-zA-Z)
I agree to the Terms of use

Login With Facebook:

Get Started Now. It's Free!

Get portfolio suggestions for your
401k plan or brokerage accounts

Powered by MyPlanIQ
You have created an account on MyPlanIQ.com by using this email "", please login MyPlanIQ account or reset your password.