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Junk bonds?

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February 15, 2008 – Comments (0)

The junk bond market is starting to blow up. Defaults are low now, but are expected to rise. Yield spreads versus treasuries are rising. Junk bonds had been doing very well the last few years, and were definitely overvalued before the market started selling off.

So, if you think junk bonds have a place in your portfolio, you might want to buy soon.

If you think you want junk bonds, I would recommend Northeast Investors (NTHEX). the expenses are low, and the managers have been at the game for a long time. They have avoided a number of high profile telecom blowups before, and they have been outperforming this year. Over the long term they have done very well. Loomis Salyes Bond (LSBRX) is a multi-sector bond fund, which has also done very well. Generally speaking, multi sector bond funds may hold high yield securities as they see fit. I've heard that they typically hold one third treasuries or other safe bonds, one third high yield, and one third foreign debt. Loomis Sayles is an aggressive fund. Northeast Investors has been playing defense recently, holding shorter duration bonds.

Of course, it's a good question if you need high yield bonds at all. High yield bonds correlate with stocks to some degree. They tend to suffer when stocks suffer. Plus they have less upside. True, they offer high current income. But still, why not just go with common stocks and intermediate-term bonds? 

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