Unlocking the Potential of High-Yield Bonds: Smart Investing Strategies for Today

Bonds receive credit ratings from agencies like Moody’s, Standard & Poor’s, and Fitch, which assess their risk of default. Bonds with lower credit ratings, often called high-yield or junk bonds, carry greater risk but offer higher coupon rates to compensate investors. These bonds are typically issued by companies or consumers with less-than-perfect credit, requiring higher interest payments to attract investment.

Despite the increased risk, high-yield bonds should not be overlooked. They present unique investment opportunities for those who understand how to evaluate them carefully.

Key Insights

• High-yield bonds are debt securities from issuers with higher default risk but offer higher returns.
• While riskier than investment-grade bonds, they can enhance portfolio performance when selected wisely.
• Diversifying through high-yield bond ETFs can mitigate risks associated with individual bond defaults.

Finding Value in Junk Bonds

For most investors, identifying the best high-yield bond investments can be challenging. The most effective approach is to invest via high-yield mutual funds, closed-end funds (CEFs), or exchange-traded funds (ETFs). These vehicles provide diversified exposure to multiple high-yield bonds, reducing individual security risk, and benefit from professional management with in-depth research capabilities.

Additionally, funds can leverage bulk purchasing advantages, access exclusive bond issues, and employ leveraging strategies to enhance returns. Closed-end funds, which issue a fixed number of shares and trade on secondary markets, sometimes trade below their net asset value (NAV), creating opportunities for investors to profit from both income distributions and capital appreciation.

As of 2025, over 60 high-yield bond ETFs are available in the U.S., including notable options like the SPDR Bloomberg High Yield Bond ETF (JNK) and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). For investors choosing individual bonds, focusing on “fallen angels”—companies with solid track records facing temporary setbacks—can be a prudent strategy.

Additional Considerations

Investing in bonds from fallen angels often means acquiring securities at deep discounts with attractive yields, while the risk of default may be lower than market ratings suggest. Evaluating a company’s financial health and stock market sentiment can provide valuable clues about the bond’s stability.

Monitoring interest rate trends is crucial since high-yield bonds can benefit in rising rate environments as their prices adjust to align with new, higher-yielding issues.

Expert Perspective

Donald P. Gould
Gould Asset Management, Claremont, California

High-yield bonds are neither inherently good nor bad; they represent bonds rated below investment grade, such as below BBB by S&P. Their higher yields compensate for increased credit risk. Their performance often correlates more closely with stock markets than with higher-grade bonds. Economic downturns can reduce issuer profitability, increasing default risk and causing bond prices to fall alongside stocks.

Understanding Junk Bonds

Junk bonds, or high-yield bonds, carry a greater default risk than most corporate or government bonds, compensated by higher interest yields.

What Is a Mutual Fund?

A mutual fund pools investor capital to purchase a diversified mix of securities. High-yield mutual funds focus primarily on junk bonds to generate higher income.

What Is a Closed-End Fund?

Closed-end funds issue a fixed number of shares through an IPO and trade on stock exchanges. High-yield CEFs invest mainly in junk bonds, offering unique opportunities including trading at discounts to NAV.

What Is an Exchange-Traded Fund (ETF)?

ETFs are funds traded on exchanges like stocks, holding diversified assets. High-yield ETFs concentrate on junk bonds, providing accessible, diversified exposure.

Final Thoughts

High-yield bonds offer the potential for greater returns through higher yields but come with increased risk of default. By investing through diversified funds and carefully selecting opportunities, investors can balance risk and reward effectively in their portfolios.

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