Financial Advisers: Stick to Investment-Grade Corporate Bonds Over Junk Bonds

Tuesday, 30 Jul 2013 07:57 AM

By Dan Weil

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Money is flowing back into high-yield bond mutual funds and exchange-traded funds (ETFs) this month after a selloff in June.

But financial advisers tell The Wall Street Journal that investors would be better off sticking with the safety of investment-grade corporate bonds.

Junk bonds, of course, yield more than their investment-grade brethren. The Vanguard High Yield Corporate fund has yield of 6.21 percent, compared with 3.29 percent for the Vanguard Intermediate-Term Corporate Bond Index fund.

Editor's Note:
 
Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

But junk bonds not only carry interest-rate risk, like other bonds do. They also have more credit risk, because they are issued by companies with financial problems.

So far that hasn't deterred investors. For the four weeks ended July 24, high-yield ETFs drew more than $2.9 billion, according research firm IndexUniverse, while investment-grade-bond ETFs attracted only $203 million.

But don't join the crowd, says Lucas Turton, chief investment officer at Windham Capital Management.

"We're finding investment-grade corporates to be a good place to hide out as bond markets search for some sort of equilibrium," he tells The Journal. "It just doesn't seem like a good time now to court more risk by moving too deeply into high-yield bonds."

As for bonds in general, they are set to cause investors pain in coming years, says Steven Wieting, global chief investment strategist at Citi Private Bank.

"Five years after the largest banking and credit shock of the modern era, interest rates are still exceptionally low by historic standards," he writes in a report obtained by Barron's.

"In our view, an eventual return to merely 'normal' interest rate levels will represent a huge portfolio challenge for investors for years to come, even if the adjustment process is gradual and intermittent."

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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