High-yield bonds (or junk bonds) are known for being high-risk, yet potentially high-reward, investments. They are usually offered by companies with little positive reputation, such as startups, or “fallen angels” — companies who once had a good credit rating but now no longer.
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One benefit of a high-yield bond is its potential for a higher return — but this comes at a big risk.
Current Positives of High-Yield Bonds
Right now, prices for high-yield bonds are generally reasonable and all-in yields may potentially see a significant future pay-off.
“While current high yield bond spreads are tight by historical measures, all-in yields near 8% have historically translated into attractive forward returns for investors,” per a recent Lord Abbett article.
Additionally, the quality of high-yield bonds has improved recently, according to Northern Trust. “High yield issuers generally have become larger and more diversified, improving their ability to weather economic adversity.”
In 2024, a high-yield bond could potentially be a way to diversify an investor’s portfolio.
The Struggle of High-Yield Bonds
The most significant issue that high-yield bonds face are their volatility.
“Only a few things in investing life are certain,” reported The Wall Street Journal. “One is that investors will always find a way to lose ungodly amounts of money on bond funds.”
Sometimes, it can truly seem like taking a gamble on a company that either has not had the time to build positive credit, or a company that fell from grace and is clawing its way back up to the top.
“If you predict that rates will fall and you turn out to be right, you’ll hit a home run with long-term bonds,” The Wall Street Journal noted.
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Ultimately, investing in high-yield bonds, like investing in any other facet of the stock market, comes at a risk — but it could be that investing in high-yield bonds now may reap rewards in the future.
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This article originally appeared on GOBankingRates.com: Should You Invest In High-Yield Bonds Right Now?
