n the first eight months of 2008, junk bond yields rose from about 300 basis points (three percentage points) above Treasury yields to about 800 basis points (eight percentage points) above Treasuries. As financial problems became more apparent at year-end, junk bond prices fell and yields rose. By now, junk bonds offer yields 1,500–1,600 basis points (15-16 percentage points) above Treasuries of comparable maturity. Even after fees, junk bond funds now yield almost 11 percent, on average.
Junk bond yields are high because many issuers are likely to default, in a weak economy. Some junk bonds may be hard to sell at a reasonable price. However, the low prices (and high yields) of junk bonds indicate that financial markets have anticipated such problems.
Thus, the risks of junk-bond investing may be lower now than they were a year ago. The potential rewards are appealing: high current yields now and the chance for capital gains when the economy recovers. Therefore, if you’re looking for a speculative investment, you might consider putting a small portion of your portfolio into a junk-bond fund. Morningstar’s pick’s include T. Rowe Price High-Yield and PIMCO High-Yield, four-star funds that yield around 10 percent now.
