| Without question, the economy has surfaced out | | | | as they were once expected to be. This makes a |
| of the grips of the latest recession. More and | | | | bit of sense because, as the economy recovers |
| more positive news is coming out of the various | | | | the rates charged to companies will start to |
| government departments that report on housing | | | | stabilize (they have already dropped a lot). That |
| starts, consumer confidence, automotive sales | | | | means that people investing in high yield bonds will |
| and so on and so forth. Companies are starting to | | | | need to do so for the income alone. Does that |
| report profits (at last) or narrower losses (well, it's | | | | means that rates will start to rise? Yes, |
| a start). | | | | eventually. |
| In fact, investors' impressions are that things | | | | Realistically, however, the economy has not |
| have turned around. The markets support this, | | | | recovered entirely. There is still a lot of room for |
| with most of the global markets having returned | | | | the market to recover as well. And with the |
| considerable gains over the past year. As well, | | | | expectation that rates will flatten over the coming |
| rates that companies pay on borrowed capital | | | | year, it does not mean, for one minute, that |
| have been coming down. Those yields are not | | | | corporate bonds are the "wrong" place to invest. |
| longer dripping with immediate profitability. Many | | | | Quite the contrary; investors seeking better yields |
| suggest that corporate bonds, which make up a | | | | from their income class of investments ought to |
| niche of bonds called high yield investments, are | | | | purchase these types of bonds. |
| fairly priced. This tells us that there is no longer | | | | The reason? Corporate bonds still have value in |
| such a great opportunity for substantial gains | | | | the fact that it could be close to a full year |
| (many high yield bond funds returned more than | | | | before those rates even level out. Look at the |
| 40% in 2009). | | | | Dow Jones; down for the year. The S&P; |
| But does that mean that high yield bond funds are | | | | down for the year. If the markets are forward |
| no longer the place to invest? | | | | looking, then they are telling us that there is still |
| Not at all. Remember that the purpose of | | | | some volatility in equity markets. |
| investing in bonds is primarily for the income they | | | | As well, the spread between corporate and |
| produce (this is why they are part of the | | | | government issues needs to narrow a touch |
| "income" class of investments, after all). A | | | | more. Since it is unlikely that government rates |
| secondary objective is to achieve gains as rates | | | | are going to increase anytime soon, corporate |
| start to come down (in so doing, lower rates push | | | | rates will have to come down a little more. This |
| the price of those bonds higher, allow for capital | | | | does not mean that investors should expect to |
| gains). | | | | find 40% returns for the year; but a healthy |
| What makes high yield bonds a touch risky right | | | | return should still be achieved. |
| now is that those gains may not be as abundant | | | | |