Are High-Yield Bonds Too Risky? 5.00 / 5 (100.00%) 1 vote

Like many novice investors, you are probably asking the question, Are high-yield bonds too risky?.  It is important to note that increased risk creates the possibility for increased returns and this is certainly true of these bonds. Ultimately, each investor will have to assess his or her own risk tolerance in order to answer this question effectively.  There are, however, a number of important things that people should know about the investments that have earned the unfortunate title of junk bonds.

Are High-Yield Bonds Too Risky?

What Junk Bonds Are

High-yield bonds are basically debt obligations that have Ba bond ratings or lower.  Due to this fact, many people consider these bonds as being below investment grade, meaning that they are not a worthwhile addition to the portfolio.  It is vital to note that some of the most well-known businesses have had debt obligations that have been deemed as being below investment grade.  Among these are General Motors and Ford along with some of the most reputable Fortune 500 companies out there.

People can buy junk bonds through mutual fund investments that are high-yield or as individual issues.  People are basically investing in companies that are currently facing financial hardship.  For this reason, opting for individual issues is rarely ideal when it comes to mitigating the risks associated with these investments.  Mutual fund investments can lower the risks of this type of investing, given that these are essentially a diverse pool of below investment grade bonds that have been lumped together.

The Benefits of Purchasing High-Yield Bonds

There are a number of advantages that investors can gain by opting to add low-quality or junk bonds to their portfolios.  Foremost among these is the ability to secure investments that could potentially provide better returns than top-rated corporate issues, CDs and government bonds.  Moreover, these are commonly debts that are coming from good companies that have simply had a bad year.

These bonds are also far less vulnerable to shifts in interest rates.  This is certainly the case at the lowest credit quality levels.  High-yield bonds are a bit like stocks in terms of their reliance upon economic strength.  For this and other reasons, their addition to the portfolio will in some instances, help to lower overall risk for the investor.

The Risks of Using High-Yield Bonds

In spite of the amazing potential of these investments, people should be cognizant of the risks that they entail.  The risk of default and their volatility are certainly among these.  Yields for these can also be reduced by soaring interest and poor economic conditions.  There are also a number of political risks as well as changing currency rates and the potential for weakening foreign markets.  With greater risk tolerance, however, the individual may find that these products are worth adding to the investment portfolio.  If you are asking the question, Are high-yield bonds too risky?, it is important to account for the ability of these to reduce all-around portfolio risk and to generate increased returns.