High yield bonds continue to improve. According to Merrill Lynch, average risk premiums on junk bonds fell to 19.25 this week from 19.55 last week. Two weeks ago the premium was 20.18. With an historic default rate of about 4 1/2%, recent junk bond pricing has been indicating default rates in excess of 20%. Though not impossible, that kind of default rate would forecast depression.
Pricing of individual bonds rated B1 or lower is problematic for small investors. Two ETFs offer wide spectrum diversification: HYG and JNK. HYG has recently been performing better than JNK. This probably reflects HYG’s higher rated portfolio mix. Yield hogs should be wary: JNK carries a current yield in excess of 14% while HYG yields about 10%. You don’t get those kinds of yields without significant risk. And, those yields reflect current payments by issuers, not guaranteed.
Disclosure: own JNK
