: Junk bonds aren’t as junky as investors think – which makes them a good contrarian buy

by | Jul 19, 2022 | Stock Market

High-yield debt of riskier companies is not as junky as investors believe. So these bonds have sold off too much. Consider finding a place for them in your investment portfolio: Junk bonds are now a source of decent dividend yield and potential capital appreciation – and a compelling contrarian play. “I’ve been doing this a long time, and I think now is a very attractive time to enter the asset class,” T. Rowe Price US High Yield fund
manager Kevin Loome told me in a recent interview. Because of widespread fears of recession “the market assuming defaults are going to be higher than they actually will be,” says Loome, who has been analyzing junk bonds since the mid-1990s.

High yield or “junk bonds” are issues rated below BB by ratings firm Standard & Poor’s. The Standard & Poor’s credit rating scale ranges from AAA at the top to very risky C and D at the bottom. BB is where speculative-grade or junk status begins, one notch below the BBB range, which is the lowest investment-grade range. Moody’s and Fitch also rate bonds, with a similar scale though the names for ratings vary a bit. High-yield debt now pays an 8.7% dividend yield overall, but the total return potential will be much greater if prices for junk bonds rise from here. That’s likely, for five reasons described below. Loome particularly favors lower-rated CCC bonds, which recently paid a yield of close to 15% on average. Not only is the yiel …

Article Attribution | Read More at Article Source

Share This