In our current low-interest-rate environment, many investors are widening their search for more income by buying junk.
Junk bonds, that is.
More formally known as high-yield bonds - junk bonds have been on a tear lately.
With the Federal Reserve vowing to keep interest rates at or near zero through 2014, investors seeking higher-yield investments are eyeing junk bond exchange-traded funds (ETFs).
Investors dumped $31 billion into high-yield bond funds during the first quarter of 2012 according to research firm EPFR Global. That's almost four times the global demand for junk-bond funds in 2011.
Here's why.
Junk bonds are offering generous dividends at a time when most other bond investments aren't even matching the rate of inflation.
"Clients are essentially trying to replace the income they used to get from their government bonds," Hans Olsen, head of investment strategy in the Americas for Barclays Wealth, told Bloomberg News.
Indeed, one of the largest junk bond exchange traded funds, the iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) is currently yielding more than 7%, while yields on the 10-year Treasury note hover just above 2%.
But while robust demand and issuance for junk bonds is a sign of a healthy market, there are reasons for concern.
Corporate Bonds
Article Index
Are Junk Bonds About to Become a Victim of Their Own Popularity?
To continue reading, please click here...
A Sovereign-Debt-Default Survival Kit: The Four Countries That Will Keep Their AAA Ratings
Stories about debt downgrades and sovereign-debt defaults are dominating the headlines.
And it's no longer just Europe that we have to be worried about. On Friday, Standard and Poor's warned that there was a 50-50 chance that the United States would lose its AAA debt rating in the next 90 days - even if the debt ceiling didn't result in a U.S. default.
When you get right down to it, we're all asking the same urgent question: Just where the hell can I go for a really safe investment?
Fortunately, I have an answer for you.
With a cut in the country's credit rating, those days would be over.
If you're searching for alternatives to U.S. debt, the good news is that Standard & Poor's has granted 18 other countries that top AAA credit rating. The bad news is that the selection isn't as luxuriant as it first appears.
It's important to separate the prospects from the suspects.
And it's no longer just Europe that we have to be worried about. On Friday, Standard and Poor's warned that there was a 50-50 chance that the United States would lose its AAA debt rating in the next 90 days - even if the debt ceiling didn't result in a U.S. default.
When you get right down to it, we're all asking the same urgent question: Just where the hell can I go for a really safe investment?
Fortunately, I have an answer for you.
The Sovereign-Debt-Default Survival Guide
S&P put us on notice back in April, when the ratings agency affirmed the country's AAA/A-1+ sovereign credit ratings - but also cut its outlook on the United States' long-term debt rating from "stable" to "negative." The last time that happened to the United States was 70 years ago - right after the attack on Pearl Harbor. What S&P is talking about now, though, is a reduction of the country's actual credit rating. For years, investors throughout the world have viewed U.S. government debt as the "safe haven" of last resort.With a cut in the country's credit rating, those days would be over.
If you're searching for alternatives to U.S. debt, the good news is that Standard & Poor's has granted 18 other countries that top AAA credit rating. The bad news is that the selection isn't as luxuriant as it first appears.
It's important to separate the prospects from the suspects.
To continue reading, please click here ...
Record Low Interest Rates Create Stampede to Issue Corporate Bonds
With interest rates at or near historic lows, companies have been issuing corporate bonds at a breathtaking pace, setting a weekly record this month.
Excluding financial services companies, corporate borrowing for the week ending May 20 reached $29.7 billion, which beat the previous weekly record of $29.04 billion set last September.
Those rushing to add corporate debt this year include some companies already flush with cash, such as Google Inc. (Nasdaq: GOOG), Microsoft Corp. (Nasdaq: MSFT), and Johnson & Johnson (NYSE: JNJ).
With the U.S. Federal Reserve buying up government debt, yields on such benchmarks as the 10-year Treasury note fell from 3.725% in early February to 3.118% in mid-May. Corporate bonds are priced against Treasuries, so when yields fall on government bonds it makes corporate borrowing cheaper.
The unusually low interest rates make acquiring debt very attractive even for companies with no immediate need for the money.
Excluding financial services companies, corporate borrowing for the week ending May 20 reached $29.7 billion, which beat the previous weekly record of $29.04 billion set last September.
Those rushing to add corporate debt this year include some companies already flush with cash, such as Google Inc. (Nasdaq: GOOG), Microsoft Corp. (Nasdaq: MSFT), and Johnson & Johnson (NYSE: JNJ).
With the U.S. Federal Reserve buying up government debt, yields on such benchmarks as the 10-year Treasury note fell from 3.725% in early February to 3.118% in mid-May. Corporate bonds are priced against Treasuries, so when yields fall on government bonds it makes corporate borrowing cheaper.
The unusually low interest rates make acquiring debt very attractive even for companies with no immediate need for the money.