Even during stable markets, high-yield (junk) bonds are considered to be speculative, high-risk investments. High-yield bonds can be volatile. After a four-month buying surge beginning in January, more than $3 billion left high-yield bond funds during the week ended May 23. Some are calling on investors seeking yield to put money into high-yield bond funds (“Is Now the Time to Buy Junk?” by Ken Levisohn, Wall Street Journal).

High-yield bonds and stocks have similar market risk and return characteristics. High-yield bond prices have a much greater correlation with the movement of stock prices than with investment grade bonds. Thus junk bonds do not add the benefit of diversification that investment grade bonds do.

Junk bonds also have credit risk - the risk that the issuer will default on its payments. Investors therefore demand higher yields than they do for investment grade bonds as compensation for the increased risk of default.

Perhaps most alarming, junk bonds are generally illiquid, meaning there is not always a ready market in which to sell them. The lower the bond’s rating, the less liquid the bond is. This illiquidity can be more pronounced in periods of market stress. Money is rapidly flowing out of high yield bond funds, which are composed of bonds rated below BBB by Standard & Poors and below Baa by Moody’s. With Europe looking shakier, investors have sought the safety of U.S. Treasuries. Others also urge caution. “It’s not the optimal time to add risk,” according to Brad Rogoff, head of credit strategy at Barclays, as a worsening of the Euro crisis could lead to more selling of junk bonds.

The most important of investors’ rights is the right to be informed! This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors’ rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.