High Yield Corporate Bonds

[nun]

With the big interest rates being charged to lend money to the less that AAA credit grade corporations out there junk bonds have taken off this year. What are you opinions about them in a portfolio. I've always stayed away from them because I see them as risky and volatile, is in now the time to buy a something like Vanguard High Yield Corporate Bond fund?

[clifp]

I bought VEHWX back in Nov when the yields were near 12% and the price was 4.31. The price is now $5.31 and the yield has dropped to 8.5%. I stopped reinvesting dividends several months ago. As others have said high yield bonds historically behave as a hybrid between equities and bonds. So for AA purpose a 10% investment in the Vanguard High Yield should probably count as say 5% stocks and 5% bonds.

I personally don't think we've seen the end of this wave of corporate bankruptcies. On the other hand Vanguard has historically held safer junk bonds. For instance when I bought it back in Nov. they held no Chrysler, or GM bonds, and only a bit of GMAC and small amount of Ford bonds.

[freebird5825]

None for me, thanks. Maybe I'm missing an opportunity, but somehow the word "junk", used to informally label these bonds, speaks volumes to my chicken feathers.
There was some sort of junk bond crisis back in the 70s, or was it the 80s , or both for all I know, that stands out in my memory banks before I was even an investor.

[brewer12345]

High yield is less of the deal it was a few months ago, but spreads are still extremely high. If you believe that the economy has turned the corner, it likely means that the defaults that are already baked in and obvious will be most of them, so there could be good values in junk.

I own one junk bond which was issued by a company I already had a sizable equity position in and have followed for years. It was very hard to buy as a retail investor and has appreciated from 60 cents on the dollar to 85 (at last trade). Between how hard it is to buy as a retailer and the fact that you simply must be able to do solid credit work to avoid getting blown up with defaults, I would suggest that you use a fund for junk unless you have a strong background in securities analysis.

I think a very nice risk adjusted return is currently offered by BBB and A rated corporates (investment grade, but not AA or AAA). Most of these companies are quite solid and face very little risk of default, yet you get a very attractive yield (350 to 400 BP over treasuiries). Since I expect the rally in corporate credit to continue trickling down to A and BBB bonds (this is what insurance companies buy and every one I follow has publicly stated they are using excess cash to buy bonds), there may well be attractive capital gains down the road.