Updated: November 4, 2015
High yield bonds are starting to wobble a bit. The average Morningstar-rated fund is down 1.8% over the last three months, while the S&P U.S. High Yield Corporate Bond Index is down 1.3% over the same time period. For most “junk bond” investors, these principal losses wiped out their entire quarter’s worth of yield, and then some.
The credit markets can flip from dangerous to disastrous in a hurry. From May to December 2008, the S&P U.S. High Yield Corporate Bond Index plummeted 32% in just six months. A 6% annual yield doesn’t buffer a drop like that.
And whether a collapse is imminent or not, you can be sure it’s only a matter of time – be it quarters, or years – because that’s just what credit markets do every so often.…