Are Junk Bonds A Good Investment Choice?

Are Junk Bonds A Good Investment Choice

ETFs and mutual funds that include junk bonds recently saw a huge surge of $5 billion a week. Is this a good investment or should you stay away from junk bonds?
If you have been paying attention to what is happening on the market, it seems that investors are taking risks. Junk bond prices are only one of the indicators that show how risky investing is at the moment. Asian stocks have been in the black for most of 2016, oil is going for over $40 and even the Dow Jones is positive, which hasn’t happened in a long time.
But how long will this last? Is it a good investment to purchase junk bonds and to place your money in high-yield funds?

Oil prices and bonds
Oil prices and bonds
If you compare high-yield bond funds with other products on the bond market, you will notice that funds have been doing fairly well. For instance, PHDAX, Pimco High Yield has been up by 5% in the padt month. On the other hand, the Barclays Aggregate Bond Index is barely staying above zero. Junk bonds have been doing fairly well because oil prices are stable and because investors have an overall positive sentiment about these bonds. It is true that the correlation between bonds and oil prices is difficult to prove but there is stronger evidence towards the correlation between oil prices and junk bonds.
Let’s take the example of Petrobas (PBR), one of the large troubled oil companies. This company is in debt because they borrowed money to finance their operations when the economy was doing well. This company is now further in debt due to the plunge in oil prices. Crude oil prices going up will not solve the problems of a lot of oil companies but higher prices for crude oil are beneficial to high yield bonds. This is especially true of high yield bonds that are connected to oil companies because the fear that these companies will default is no longer an issue.

What should you do with junk bonds?

If you have shares of high yield bond funds at the moment or are wondering if you should invest in this type of bonds, you need to base your decision on your goals instead of focusing on timing strategies.
For instance, if you are interested in long-term investments and would like to hold some investment for the next ten years, keeping your junk bonds can be a good strategy. This is especially true if you are holding on to these bonds to diversify your portfolio, for instance if you already have shares of bond market index fund.
However, if you are investing on a much shorter time frame and do not want to take a lot of risks, investing in high yield bond funds is not a good option. It might be best to sell your shares in junk bond funds is you have any.
If you have bond securities, it is probably best to keep them so you can keep getting an income from these securities. You should consider selling your securities only if you think that the company that issued these bonds is likely to default in the near future.
You need to go over your goals and take the big picture in consideration before deciding what to do with your investments. It is important to know what is going on with the market but everything you do needs to be justified by your goals.