High-yield bonds have long been a popular source of diversification for long-term investors who seek to maximize yield and/or total return potential outside of stocks.(1) High-yield issues often move independently from more conservative U.S. government bonds as well as the stock market.
High-Yield Bonds: Income Potential at a Price
These bonds — sometimes referred to as “junk” bonds — are a class of corporate debt instruments that are considered below investment grade, due to their issuers’ questionable financial situations. These situations can vary widely — from financially distressed firms to highly leveraged new companies simply aiming to pay off debts.
As the name “high yield” suggests, the competitive yields of these issues have helped attract assets. With yields significantly higher than elsewhere in the bond market, many investors have turned to high-yield bonds for both performance and diversification against stock market risks.
These are valid reasons for investing in high-yield bonds, especially long term. But as you read about what these issues could offer your portfolio, it’s also wise to consider how these bonds earned their nicknames.
In exchange for their performance potential, high-yield bonds are very sensitive to all the risk factors affecting the general bond market. Here are some of the most common risks.
The risk factors associated with high-yield investing make it imperative to carefully research potential purchases. Be sure to talk to your financial professional before adding them to your portfolio.
Note (1): Diversification does not ensure a profit or protect against a loss in a declining market.
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