Originally posted by: Aegeon
Originally posted by: Paraguay11
I like the corporate idea significantly better and would go to junkier junk if it were my money. I levered up some lower quality paper and am up 25% in 2 weeks, corporate bonds have had a bit of a run though as there is money coming into the market finally but spreads are still at levels never seen before.
The problem you seem to be missing as well is that the general point of actually investing in bonds in the first place is generally safety and not maximizing your possible returns.
What it comes down to is junk bonds generally track stocks, particularly when they crash, so there generally isn't that much difference between investing all your money in stocks and having all your bond money in junk bond funds. Many would argue that you might as well stick it in stocks if you're putting a large portion of your bond money in junk bonds.
The other options mentioned instead could potentially go down to a degree, but they should offer far better protection if stocks tank some more compared to junk bonds.
You should at a minimum understand what you're getting into when you talk about investing in a high-yield corporate bond fund.
67% correlation between High-Yield and the stock market. High-Yield tends to outperform on the way out before the stock market rebounds and if typical recessions are a clue HY will have a better 2 years out of recession than the S & P 500. Typically you can recover around .30$ on the dollar for high yield paper across all industries when they go into liquidation. 2 weeks ago the index was trading at 510 (300 being typical recovery, 40% at this point looks like the ultimate downside assuming the risk free rate of return is 0, also assuming no one in the market is willing to take any risk and only purchases treasuries) and 2300bp over treasuries. It is pretty easy to see what is going to default and if you can be selective in your high yield it is a great asset class. Having said that HY is now trading at 660 in 3 weeks so you missed out on the first major leg up. Wait for a pull back and buy again. I am not saying you go 100% into high-yield, but it sure makes sense to put a portion in and portion into preferreds. High-yield is a market that used to have significant liquidity which up until 2-3 weeks ago had none going back to the crash of Lehman.
Where the credit markets are right now you would be an idiot to put the credit side of your portfolio in Government MBS or Treasury's. The idea of a total bond index is a good idea.
Don't tell people you have a Roth IRA they know the threshold of your income then .
And as far as JS80 is saying, I am not exactly sure what analyst he is looking at. Most have said that the credit arena, preferreds, corps, high yield and good quality munis are the opportunity of a lifetime. Sifting through data on a daily basis of the credit market I have seen very few incredibly bearish opinions on corporates.
JS80 is also forgetting the idea that the market is forward looking and the credit markets are incredibly forward looking. The credit markets predicted Dow 8000 24 months ago and have had the leg down. 12 months ago Macy's bonds traded for 110, now they trade for 65, they are still rated BB. They have enough cash to pay their coupons for 3 years with no sales. Somewhere in the middle is the true price.
Remember the credit market dollar value wise is 10-12 times the size of the equity market and the analysts and market participants are significantly smarter than those in the equity market.
High-yield is the hardest asset class to understand for most investors as there are many dynamics in play which influence the overall price.
This advice is not a solicitation to buy or sell a security and does not necessarily represent the views of myself or my current employer. All information disseminated in this post should only be relied upon with the advice of your own financial adviser.