High Yield Bond Funds (2024)

FAQs

Are high-yield bond funds worth it? ›

Despite those risks, performance has been positive lately. High-yield bonds have generally outperformed high-quality investments like U.S. Treasuries, investment-grade corporate bonds, and the overall US Aggregate Index this year, but that pace of outperformance may be difficult to replicate going forward.

What are the risks? Compared to investment grade corporate and sovereign bonds, high yield bonds are more volatile with higher default risk among underlying issuers. In times of economic stress, defaults may spike, making the asset class more sensitive to the economic outlook than other sectors of the bond market.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments ...

Meketa Investment Group recommends that most diversified long-term pools consider allocating to high yield bonds, and if they do so, between five and ten percent of total assets in favorable markets, and maintaining a toehold investment even in adverse environments to permit rapid re-allocation should valuations shift.

The big deal with high-yield corporate bonds is that when a recession hits, the companies issuing these are the first to go. However, some companies that don't have an investment-grade rating on their bonds are recession-resistant because they boom at such times.

The Bottom Line. Interest rates and bond prices have an inverse relationship. When interest rates go up, the prices of bonds go down, and when interest rates go down, the prices of bonds go up.

A high-yield corporate bond is a type of corporate bond that offers a higher rate of interest because of its higher risk of default. When companies with a greater estimated default risk issue bonds, they may be unable to obtain an investment-grade bond credit rating.

Key takeaways. Relatively high yields on investment-grade bonds are reducing risks posed by interest rate uncertainty and creating a favorable environment for investors in the second half of 2024.

Of the three, high-yield corporate bonds generally represent the most aggressive investment and Treasury bonds the least aggressive. The difference in the credit quality of the bond issuers certainly plays a role, but other factors can influence bond yields as well.

As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets. If your bond ETF loses value, you can wait out the interest rate changes or reallocate to money market accounts (MMAs), certificates of deposit (CDs), or high-yield savings accounts.

Are bond funds safe in a market crash? ›

Yes, you can lose money investing in bonds if the bond issuer defaults on the loan or if you sell the bond for less than you bought it for. Are bonds safe if the market crashes? Even if the stock market crashes, you aren't likely to see your bond investments take large hits.

This is a rule that aims to aid diversification in an investment portfolio. It states that one should not hold more than 5% of the total value of the portfolio in a single security.

Key Takeaways. High-yield, or "junk" bonds are those debt securities issued by companies with less certain prospects and a greater probability of default. These bonds are inherently more risky than bonds issued by more credit-worthy companies, but with greater risk also comes greater potential for return.

How much is too much? The general rule is to have three to six months' worth of living expenses (rent, utilities, food, car payments, etc.)

Because bond prices typically rise when interest rates fall, the best way to earn a high total return from a bond or bond fund is to buy it when interest rates are high but about to come down.

The disadvantages of bond funds include higher management fees, the uncertainty created with tax bills, and exposure to interest rate changes.

Junk Bonds

Junk bonds are high-yield corporate bonds issued by companies with lower credit ratings. Because of their higher risk of default, they offer higher interest rates, potentially providing returns over 10%. During economic growth periods, the risk of default decreases, making junk bonds particularly attractive.

Investment advisers say now is a fine time for bonds. They are a good investment in 2024, experts say, for the same reasons they felt like a bad investment in 2022. That year, the Federal Reserve embarked on a dramatic campaign of interest-rate hikes in response to inflation, which reached a 40-year high.