Lower junk bond yields may mean investors are more confident about an economic recovery. Then again, it might only mean investors are desperately seeking yield in the today's low-rate environment.
Investors seeking reliable yield barely above inflation have few options.
"High-yield has a captive audience," Adrian Miller, director of fixed-income strategy at GMP Securities, told the Financial Times. "There's a universe of investors sitting on piles of excess cash that needs to go somewhere. It is all going to high-yield."
Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.
An expected political battle over raising the U.S. debt limit might throw financial markets into turmoil. But with debt limit discussions a few weeks away investors are sending more money into junk bonds, also called high-yield bonds. Inflows into junk bond funds were the highest last week than they've been since September, according to EPFR Global data cited by the Times.
Yields for U.S. junk bonds are now below 6 percent, according to the Times. Triple-C debt, the lowest-rated bonds, is yielding an average of 8.2 percent, down from 11.5 percent in a year.
Miller said investors should expect yields on junk bonds of about 6.5 percent this year, the Times reported.
High-yield bond mutual funds generated total returns of 14 percent last year, better than all fixed-income funds except emerging markets, according to data from Morningstar cited by The New York Times.
However, investors face several risks that can prompt the bonds' values to drop. The borrowers may default, interest rates might rise, the economy could fall into a recession and investors might pull out their money in favor of another sector.
The Times cited emerging signs of a reversal of money flowing into junk bonds. High-yield mutual funds reported outflows in September, November and December, and high-yield exchange-traded funds had outflows in October and November.
“The greatest risk is rotation out of high-yield into equities as a result of an improving economy and improving earnings,” Elaine Stokes of the Loomis Sayles High Income fund told The New York Times.
Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.
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