There’s Still Value in High Yield Bonds

A particular bond’s price may fluctuate wildly day-to-day in the face of money sloshing in and out of ETFs. But if it has an 8 percent yield to maturity when you buy it, you’re guaranteed that until it pays off.

So here’s our recommendation. Avoid high yield bond ETFs as well as most mutual funds that specialize in high yield debt. With interest rate spreads this low this late in the economic cycle, potential returns don’t compensate for the risk.

Rather, shop selectivity among individual bonds, preferably in industries you know. One rule of thumb that’s never let me down is to buy bonds of companies whose common stock I’d consider at the right price. You need to understand the risks to a company’s solvency over the life of the bond, and how to tell if things are getting better or worse.

There’s always a reason behind an exceptionally high yield. But as with individual stocks, perception is what really determines a bond’s price. And the market mood frequently exaggerates the reality, particularly when investors are fearful.

The furor about cord cutting in the communications sector is a good example. It’s nothing new. Consumers and businesses have been abandoning their copper wire connections for broadband voice and Internet for years. Wireless phone users have been dumping 2 and 3-G for 4-G and will do so again for 5-G. Now the same thing is happening in pay television, with basic cable customers dropping service in favor of Internet based streaming.