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Junk Bond Funds – danger, Will Robinson, danger



September 05, 2012 – Comments (1) | RELATED TICKERS: BOND , HYS , VCLT

I was rather taken aback when I discovered that Vanguard has closed their junk bond funds to new investors. The relevant stats are:

 Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)

Vanguard High-Yield Corporate Fund Admiral Shares (VWEAX)

yield = 6.51%

duration = 4.2 yrs

assets = $17.9 b

 Yes, I know: many such ETFs are available, plus I have had my eyes on Pimco ETFs (BOND, HYS). Having been reminded in no uncertain terms about the huge inflow of money to junk bond instruments, I have become rather gun shy. There is the Vanguard Long-Term Corporate Bond ETF (VCLT), that yields 4.35%, but the duration is 13.9(!!!).

Your thoughts? Bubble?

1 Comments – Post Your Own

#1) On September 06, 2012 at 3:40 PM, somrh (83.78) wrote:

In comparison, VGLT has YTM of 2.4% with a higher duration (16.4 Years). So with VCLT you're getting about a 2% spread over treasuries and a lower duration while taking on a slightly higher credit risk.

Personally I don't want much interest rate risk right now. The risk/reward tradeoff doesn't seem worth it. The longest duration stuff I have is VCIT which has YTM of 2.9% and duration of  6.2 years. Most of my bond holdings are in much shorter duration investment grade stuff.

I haven't held junk bonds for some time now. I have no idea if it's in a bubble. I think spreads are a lot tighter now than they were when I was in. They are slightly below historical levels (since 1996.... data pulled from FRED:

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