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Rekenthaler Report

Are High-Yield Bonds Necessary?

The answer is no--but that does not mean they are bad investments.


Possible Substitutes
Last month, I wrote that investors can substitute for high-yield bonds by owning a mix of 1) investment-grade bonds and 2) large-value stocks. As that statement was a side point, I did not provide evidence for the claim. Today's article does just that. 

Practically speaking, high-yield bonds are hybrid securities. As with investment-grade bonds, high-yield bonds pay income while also offering some default protection (albeit not as much as investment-grade bonds). However, they resemble stocks in being economically sensitive. Companies that issue high-yield bonds are generally not the healthiest. (If they were otherwise, their bonds wouldn't yield so much!) They are particularly vulnerable to recessions.

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.