Jane J. Kim advises high yield or junk bond investors to be cautious in her Wall Street Journal article, “Trouble Lurks in ‘Junk’ Bonds.”
While high-yield bonds have performed well over the past few years, the trend is lower bond prices and higher yields. The yield spread between high-yield bonds and Treasury bonds has risen to 5.15 percentage points, higher than the 4.7 level of a week ago and the long-term historical average of around five points.
Another problem is that companies have been issuing bonds with weaker investor protections. Money flows into high yield bonds are relatively strong. “If conditions are strong enough, companies will take advantage of it and issue bonds that are more issuer friendly than bond-investor friendly,” Michael Anderson, global high-yield strategist at Citigroup Inc., was quoted as saying.
Examples of such issuer-friendly bonds are “PIK toggle,” or payment-in-kind, bonds issued by the likes of CKE Restaurants Inc. and Bumble Bee Holdings Inc. Such bonds were prevalent in the run-up to the credit crisis, as they allow issuers to make debt payments by issuing more debt. “It means if your cash flow is getting tight, you can issue bonds instead?which means you will have a larger interest obligation come the next pay period,” one analyst was quoted as saying.
High-yield bond-fund managers are trying to lower expectations, according to Morningstar. Other money managers have reportedly reduced high-yield bonds exposure.
“Anytime there’s uncertainty, that’s bad for risky assets,” Mr. Anderson observed confirming that “high yield is certainly a risky asset.”
Page Perry has over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.