“Corporate bonds are denoted high yield for the sole reason that firms issuing them are highly leveraged,” Morningstar analyst Timothy Strauts writes in profile of JNK. “With increased leverage comes the increased probability of default and bankruptcy. In the grand scheme of things, risk equals return, and the high yield of these bonds is designed to compensate investors for this risk.”
Companies are rushing to sell speculative-grade debt, and investors keep snapping it up.
“With interest rates being so low for so long, yield-starved investors have been increasingly willing to risk their money on junk bonds in order to get that extra yield,” writes Christopher Matthews for Time magazine. “And as new money starts pouring into high-yield bonds, some are starting to worry that the junk bond market has reached bubble-like levels.”
iShares iBoxx High Yield Corporate Bond
Full disclosure: Tom Lydon’s clients own JNK and HYG.