Junk Bonds: Yields Are Up - Are They Worth the Risk?

Includes: JNK, PVI
by: J.D. Steinhilber

The following was excerpted from Agile Investments' Monthly Market Review:

High yield bonds had their best month in April since 2002. Spreads have narrowed nearly 2% from their 1st quarter highs, when junk bond indexes traded at yield premiums of 7-8% over comparable Treasuries. The nearly 9% yield available from the SPDR Lehman High Yield ETF (NYSEARCA:JNK) is attractive on a relative basis, but conservative investors seeking income may want to wait to see if higher yields develop as defaults rise and Treasuries correct. Historically, absolute yields of 10% have been an effective threshold forthe high yield asset class to be considered attractively valued and for investors to be adequately compensated for the risk inherent in junk bonds.

For taxable investors, municipal bonds offer good value. Dislocations in the municipal bond markets (e.g. auction failures and uncertainties regarding the solvency of bond insurers) have pushed muni bond yields to historically high levels relative to Treasuries. For taxable accounts, the PowerShares VRDO Tax-Free ETF (NYSEARCA:PVI) offers an attractive short-term, high quality fixed income alternative with a taxable-equivalent yield as high as 4.67% (see table at bottom of page).

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