Monday, April 20, 2009

Investing in Bonds

Posted By: Allison Franklin

Personal Finance: High-yield bonds still a high risk
By Gail MarksJarvis
Chicago Tribune
Many investors are being enticed by tremendous yields to take a chance on junk bonds.
If you are one of them, be aware of the risks.
"I think we might see the highest default rate ever," said Edward Altman, a professor at the New York University Stern School of Business and expert on bankruptcy and distressed bonds. He says he thinks it could top the 12.8 percent rate in 2002.
Even the savviest investors could have difficulty maneuvering in such an environment. Already, hedge funds that specialize in distressed debt lost an average of 27 percent last year, and high-yield - or so-called junk - bonds are likely to exert greater challenges in the months ahead.
Currently, junk bonds are yielding an average of 17 percent.
"You hear yields are attractive," Altman told professionals who manage investments for wealthy people at a recent CFA Institute conference in Chicago. "Well, good luck to you. You'll do well if there are not too many defaults. But we are predicting double digits. Then, you could have a problem."
He said that he thought a 12.3 percent default rate among high-yield bonds was likely this year and that he would not be surprised by 15.4 percent or even 18.3 percent. With yields far above Treasuries, the market is telling investors that an 18.3 percent default rate is likely, Altman said.

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