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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.

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