WATCH OUT INVESTORS--JUNK BOND RISK ON THE RISE!

Even during stable markets, high-yield (junk) bonds are considered to be speculative, high-risk investments. High-yield bonds can be volatile. After a four-month buying surge beginning in January, more than $3 billion left high-yield bond funds during the week ended May 23. Some are calling on investors seeking yield to put money into high-yield bond funds ("Is Now the Time to Buy Junk?" by Ken Levisohn, Wall Street Journal).

High-yield bonds and stocks have similar market risk and return characteristics. High-yield bond prices have a much greater correlation with the movement of stock prices than with investment grade bonds. Thus junk bonds do not add the benefit of diversification that investment grade bonds do.

Junk bonds also have credit risk - the risk that the issuer will default on its payments. Investors therefore demand higher yields than they do for investment grade bonds as compensation for the increased risk of default.

Perhaps most alarming, junk bonds are generally illiquid, meaning there is not always a ready market in which to sell them. The lower the bond's rating, the less liquid the bond is. This illiquidity can be more pronounced in periods of market stress. Money is rapidly flowing out of high yield bond funds, which are composed of bonds rated below BBB by Standard & Poors and below Baa by Moody's. With Europe looking shakier, investors have sought the safety of U.S. Treasuries. Others also urge caution. "It's not the optimal time to add risk," according to Brad Rogoff, head of credit strategy at Barclays, as a worsening of the Euro crisis could lead to more selling of junk bonds.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WATCH OUT INVESTORS--THEY ARE NOT CALLED JUNK BONDS FOR NOTHING!

Wall Street calls them "high-yield bonds" but Main Street has a better name, "junk bonds." These are long-term, interest bearing IOUs issued by companies or municipalities with poor credit ratings (indicating an inability to pay those IOUs) or none at all! These bonds pay high yields for one and only one reason-it's the only way to get investors to buy them. Apparently, many investors have forgotten who popularized them in the 1980s, Drexel-Burnham and Michael Milken, a bankrupt brokerage and felon, respectively.

High-yield (junk) municipal bonds have attracted about $5.3 billion of investors' money so far this year, but some experts think that their party is about to end. The reason for the robust growth is that the yield of junk municipal bonds is approximately 5.2 percent compared with investment grade munis that are yielding 2 percent. Similarly, the total return of one junk municipal bond ETF is 9.8 percent compared with 6.9 percent for an investment-grade muni bond ETF. While the increased yield is attractive to investors, the difference in performance is not enough to compensate for the additional risk, according to some experts ("Will 'Junk' Munis Bite Back?" by Ben Levisohn, Wall Street Journal).

The risk of high-yield (junk) munis is significant. The stagnant U.S. economy means lower tax revenues, which is putting severe stress on municipal budgets. On top of that, states, suffering from lower tax revenues, are likely to continue cutting funding to local governments. If these stresses reach a tipping point, there may be a run out of junk municipal bonds and funds as the herd stampedes into safer investment-grade municipal bonds.

One reason for the flow of investor funds into junk municipal bonds is that municipalities have been refinancing older bonds at record levels. Investors looking for the same yield must go toward the junk end of the spectrum to find it. But the spread - the difference between the yields of junk and investment grade - is narrowing. This has experts worried that the end is near for the rally into junk municipal bonds.
High-yield (junk) munis that back ancillary projects such as nursing homes and hospitals are generally even more risky because they are not general obligation bonds that are backed by the taxing powers of the city, county or state.

Defaults have been relatively rare but could increase, especially as state governments cut local government funding. The article notes that Detroit came within days of a default, leading a rating agency to cut Detroit's debt rating on June 12.

In sum, more advisers are recommending that junk muni bond investors should get out now while the getting is good. "The weak are getting weaker. This is a great time for an upgrade," one money manager was quoted as saying.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WATCH OUT FLORIDA INVESTORS--JUNK BOND ETFS THROUGHOUT THE UNITED STATES HAVE HIDDEN RISKS!

Wall Street Journal columnist Jason Zweig is warning junk bond enthusiasts to think twice before investing in junk bonds, especially junk bond exchange traded funds. In addition to the junk bonds themselves being overbought, the exchange traded funds that own them trade at a premium over the net asset value of the junk bonds. When you add the expense ratio to the premium, investors are now paying 2 percent more than the current value of the bonds. All of this means that, if investors start to dump junk bonds, the ETFs will decline about three times more than the underlying bonds. "'Junk' ETFs: Tread Lightly," Wall Street Journal).

"ETFs have their known costs and benefits. And this is one of their costs," Oleg Melentyev, head of high-yield corporate strategy at Bank of America Merrill Lynch, was quoted as saying.

The extremely low interest rate environment has hurt older Americans on fixed incomes who need their investments to produce income to meet their obligations. They are understandably seeking higher yields, and are often told that higher yields are available without incurring higher risk. As Mr. Zweig put it, however, investors considering such an alternative should "give it the sniff test, so you don't end up with a smelly surprise." Advisors should likewise be very careful to explain the risks as well as the benefits of a higher yield investment strategy.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WATCH OUT FLORIDA FIXED INCOME INVESTORS--HIGH YIELD JUNK BONDS ARE DANGEROUS!

Junk bonds have benefited both investors and issuers over the past few years, providing borrowers with some of the lowest interest rates ever, while providing yield-hungry investors with better returns than they could receive by investing in investment-grade debt. Junk bonds produce higher yields because of the increased risk of default by the issuer. "But investors run the risk of having the tide turn against them should interest rates start rising. Some analysts have begun suggesting that day could come soon" ("Junk Bonds Feed a Hungry Market," by Matt Wirz, Wall Street Journal).

So far this quarter, 130 companies have issued $75 billion in junk bonds. That is up 12 percent from the same quarter last year and is the most since Thomson Reuters began compiling data in 1980, according to the article. Junk bond mutual funds, along with their ETF cousins, reportedly have seen record inflows of $18.6 billion through March 26.

Supply of junk bonds has picked up in anticipation of higher interest rates. Demand has soared as investors have become less risk averse. Despite the belief that the Federal Reserve will keep interest rates low, experts are warning that they may soon begin to rise. As interest rates rise, bond prices fall, which would be a problem for investors in junk bond mutual funds.

Higher interest rates may also cause the economy to falter, leading to more defaults. "This is the talk of the market," Matt Conti, a manager of high-yield investments at Fidelity Investments, was quoted as saying, adding: "My general view is it's time to be defensive."

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.