High yield or junk bonds have been riding high since the start of 2017. The debts issued by firms with less than stellar credit have seen a surge in interest as the combination of low rates – thanks to the Fed – and a growing economy has made them quite attractive to investors. In fact, junk has been one of the best performing asset classes all year.
The problem is that the high times in high yield might finally be cracking.
Investors who loaded up on high yield bonds for both larger coupons and capital appreciation might get a rude awakening in the new year.
Junks Big Time Climb
On the surface, it’s easy to see how junk has done well. Despite raising rates four times or so this cycle, when you are starting in the basement, there’s plenty of room before you hit the top. Interest rates remain at historic lows. That’s still causing investors to search for income in some non-traditional sources. With junk bonds paying around 5 to 8%, that’s a lot of yield for income-starved investors.