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The Trap is Set for High-Yield Bond Investors
"Junk" bonds have that name for a good reason

By Bob Stokes
Wed, 12 Dec 2012 17:45:00 ET
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High-yield bonds are called "junk" for a reason: they receive low credit ratings. 

And, obviously, these securities are at a higher risk of default than are higher-rated bonds.
 
Even so: Low interest rates have attracted a swarm of yield hungry investors into junk bonds.
 
These investors may have stepped into a soon-to-shut trap.
 
The market for junk bonds, the pros say, has become so popular that it's dangerous.
 
Thanks largely to the unsteady economy, interest rates on U.S. government bonds have fallen to record lows. And individual investors remain leery of the stock market.
 
Desperate for better returns, they're sinking billions into higher-paying bonds backed by businesses with bad credit scores. Those deeply indebted companies have borrowed a record amount from investors and are increasingly using the money in ways that could strain their ability to pay it back.
 
Associated Press, Dec. 2
 
Dealogic reports that U.S. junk bond issuance reached a new annual record of $293 billion as of Oct. 18. Look at this chart from the November Elliott Wave Financial Forecast.
 
 
 
The chart above shows [an] accelerated rise of assets in high yield bond funds. In a refrain that hearkens back to the salad days of the Great Asset Mania, junk bond managers say the size of incoming money flows is “forcing” them into ever-riskier bonds “even though they might want to hold their nose.” ... As economic conditions worsen, junk issuers will be among the first companies to balk at making interest payments and then at paying back principal.
 
Financial Forecast, November 2012
 
The November issue also shows a chart with Elliott wave labels of the Bank of America Merrill Lynch (BofA/ML) Master II Index, which includes a graph of the number of junk bonds making new 52-week price highs relative to new 52-week price lows.
 
The new December Financial Forecast updates subscribers on the yields of junk bonds, plus municipal and 10-year Treasury bonds. In the latest issue, you'll learn why bond investors face a clear and present financial danger.
 
Protect your portfolio.
 



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