After the spectacular fall in the stock markets and subsequent exchange traded funds (ETFs), investors are increasingly seen taking their money out from under their mattresses and putting it into riskier investments.
Investors are satiating their hunger for riskier stocks by buying up companies that are in terrible shape, remarks Ben Steverman BusinessWeek.
After the market low of March 9, the S&P 500 is up more than 35% and traders are throwing money at the weakest stocks. The top 100 stocks within the S&P have total debt of more than $4 trillion while the 100 worst performers have $746 billion in debt.
The current junk stock rally is seen as a natural event that would occur after a thorough beating of the equity markets. The rally has also hurt investment managers who kept to a conservative strategy and portfolio managers are now inclined to abandon that strategy to follow current market flows.
The same situation is leading investors back to junk bonds, as well.
The yield margins of high-yield bonds over Treasuries are narrowing, as seen on the Merrill Lynch U.S. High Yield Master II index, which shrunk from more than 2.1% in February to 1.2% last Thursday, reports Tom Sullivan for Barron’s.
Demand for these junk bonds have been on the rise and the best performers were in health care and utilities. It is thought that the reason for the rally is that traditional high-yield investors never left the market but stuck it through the toughest of times.
Investors have looked to the riskier single-B securities from the double-B-rated issues. Time will tell if people will be interested in the even more riskier triple-C-rated bonds.
But will this rally be sustainable for the long-term investor? While some low-quality stocks could benefit from the recovery, some others may not fare so well. It is important to know that there is a lot of risk involved when investing in these types of stocks and a potential investor should follow some due diligence before jumping in. As always, have a strategy in place that you will stick to in order to protect yourself from the possibility of unlimited losses.
- State Street’s SPDR Lehman High Yield Bond (JNK): up 15.9% year-to-date
- iShares iBOXX $High Yield Corporate Bond (HYG): up 9.1% year-to-date
- PowerShares High Yield Corporate Bond (PHB): up 8.9% year-to-date
Max Chen contributed to this article.