Mutual funds holding junk bonds (known as “high-yield” bonds) were up 23% in the first half of 2009, on average. Such gains are unlikely to be repeated. However, junk bonds are still well-priced so such funds may deserve a place–a small place–in your portfolio.
According to a Merrill Lynch index of junk bonds, the average bond recently was priced at nearly $80. That’s up sharply from an average of $57 in late 2008, but that late 2008 price was by far a record low, caused by last year’s financial panic. Long-term, the average price on that index is over $90, so there is still a way to go before junk bonds recover to “normal” levels.
You probably won’t want to select and buy individual junk bonds. If you decide to invest, you should choose a mutual fund, where the average yield is now 9.6%. Thus, even if your fund’s price just stays where it is now, you could earn nearly 10% from the dividends. In this category, Morningstar favors the high-yield bond funds offered by Eaton Vance, T. Rowe Price, Fidelity, Vanguard, and PIMCO.
