Wednesday, August 26, 2009

Junk bond funds update

I just attended a shareholder meeting for a number of closed end funds, including junk bond funds. At the end, there was a chance to talk with their manager of taxable bond funds. His comments about junk bond funds were similar to mine.

He said that ½ a year ago, when their yields were off the charts, was a good time to buy junk bonds to lock onto exceptionally high yields. After the market rally, rates are down to high levels but closer to traditional levels. Junk bond funds can be bought for their high yields, however investors need to be aware they are facing tough times ahead. High levels of defaults may continue or even increase if the economy does not have a swift recovery. 13% yields (950 basis points above the yield on the 10-year Treasury bond) are available. The difference between 13% & 9% (or so which is generally more common) is the risk premium to absorb future defaults. As usual, the trick for successful investing is finding the funds which will have fewer defaulting bonds.

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