The Party’s Almost Over, Say High-Yield Bond Investors

Patrick R. McDowell, CFP®, AIF® was quoted in a Fortune article by Erik Sherman discussing high-yield junk bonds.

The high-yield party has been raging. But investors who stick around may have one heck of a hangover.

In recent weeks, the difference in yields between high-grade investment or government bonds and low-grade, high-yield corporate bonds dropped to 375 basis points. Often called junk bonds, companies with low credit ratings issue high-yield bonds for access to capital, although at a higher interest rate than companies with good credit.

But risk needs the right amount of reward. The shift in yields meant only 0.375% in interest now separates the safest bond investments from those issued by companies with poorer credit (and a higher risk of default). Given the narrowing yield spread, several prominent portfolio managers have decided it's time to count their winnings and bail on high-yield bond…

"Our fixed income holdings have almost exclusively been high-yield for the better part of a decade," said Patrick McDowell, a portfolio manager at Arbor Wealth Management. "We’ve done well with the strategy relative to other types of fixed income. But we are dramatically slowing our purchases."