Junk, Fallen Angel, High Yield or whatever else you want to call it, these bonds have been all the rage for many years. For almost a decade now, interest rates have been skimming the bottom of the barrel causing many to reach for better yields. One popular arena has been junk bonds. I myself have bought them in the form of a mutual fund because it’s been one of only a few bond areas returning anything. But a recent story on Investopedia gave me pause about my own holdings.
In the next 5 years a little over $1 trillion of junk debt will mature. That is not a typo, one trillion dollars worth of high yield debt will have to be paid back to investors. The question is, can these companies afford to do that. After all you don’t get a junk bond rating for your pristine income statement and balance sheets. Luckily my only holdings are in a diversified basket but still this huge sum of money could put a giant strain on a lot of companies. It is after all the largest sum of junk debt recorded by Moody’s in a 5 year period.
We’re also in a market of rising interest rates. If rates continue to climb, you’ll no longer need to reach so much for extra yield. You could get a better return without a giant side of risk. Also, the junk bond market is far from liquid on its best days let alone in a market where there is multiple sellers for every buyer. I’ve read many articles over the past few months alluding to the dark clouds on the horizon for junk bonds and I have no idea how bad it will get. The problem is no one actually knows the full extent of the damage, if any, that tomorrow holds.
It wasn’t something that I thought about during the height of the recession but all the debt being taken out by businesses to simply survive the recession would eventually have to be paid back. Well, if you survived that is. Tidal wave one is obviously just off shore and ready to crash into the beach soon. At the end of the day, I’m not going to change any of my current holdings. I’m in it for the long term and diversification is the name of the game for a long term perspective.