High-yielding, low-risk bonds are about as rare as loose $20 bills on the sidewalk. When such an opportunity arises, investors clamoring for the easy money should bid the price of the bond up until its yield is driven down to a level commensurate with its risk.
Because of this competitive pressure, bond yields are one of the best indicators of bond risk. The higher the yield, the riskier the bond. Reaching for yield can be dangerous, but many do it anyway. This can push the prices of the riskiest bonds up (and their yields down), causing them to offer a less favorable risk/reward trade-off than their lower-yielding counterparts.
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Alex Bryan does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.