High-yield (“junk”) bonds may offer good opportunities now. Their yields are attractive, compared with the yields on high-quality bonds, and we’re moving into a favorable stage of the economic cycle. Moreover, junk bonds have been depressed for years.
The First Boston High Yield Index had annual returns from 1998 through 2001 that ranged from 5.78 percent to -5.21 percent. In late 2002, that high-yield index was down for the year so the five-year return was less than 0.5 percent.
For junk bonds, such slumps aren’t unprecedented, and history may support a bullish view. In 1989-90, the high-yield market had negative returns. Then, from 1991 through 1997, high-yield bonds returned over 15 percent per year. Investors who go in now might be early but there doesn’t seem to be much downside risk. If you’re invested now, you won’t miss a big move on the upside.
Superior junk bond funds include Northeast Investors Trust, Janus High-Yield, PIMCO High Yield, Columbia High-Yield, T. Rowe Price High-Yield, and Buffalo High-Yield. At year-end, yields on these funds ranged between 6 percent (Buffalo) and 10 percent (T. Rowe Price).
