When would be a good time to invest in 'junk' bonds during the business cycle?

Question

Would this year be a good example with interest rates being this low. How about foreign 'junk' bonds as well?

Answer 1

I have never heard the term 'Junk Bonds', but it does not sound very encouraging.

The idea of a Bond is to have something very secure, therefore it makes sense to only invest in Government Bonds or well established companies.  After all, you do hope to at least get your money back.  If it sounds too good to be true, it probably is.

Answer 2

It is for times of uncertainty that the "junk" category was invented. This is a time of uncertainty. Now when things look like they are on the mend, carefully identify those with distinctly improving prospects and load up, but be really, really choosy when you do.

Answer 3

Junks bonds have the most opportunity when the economy is bad, but about to start improving.  This is when uncertainty is at its highest point and companies that have low credit ratings, below BBB is considered junk, are in the highest risk of default.  The current interest rates do matter, but do not need to be low or high for a trade to make sense.  What you should look at is the spread between government debt, like the 10 year treasury, and junk bond rates.  This spread should be high.  This means that Junk bond are yielding a high rate of return when compared to safe government bonds.  The reason there is a big difference is because investors do not what to take on the risk of owning a junk bond and having it default, so they buy very safe gov bonds.  the last time junk bond had very high returns was in 2003, as the economy started to improve and we entered and economic up cycle.

The trick is picking a point when the economy looks very bad expectations are at the lowest point and have nowhere to go but up.  This is no easy task, and no one can consistently be right about picking a bottom because it involves a lot of luck.  Foreign junk bonds are similar, but you will have to look out for currency exchange risk and the fact that their economic cycle can be different than the country you live in.

Answer 4

Best when interest rates are high and the economy is good. Rising rates hurt the value and a bad economy makes them riskier. The risk is why they are "junky".

Answer 5

junk has to do with credit rating only.  i think lower than BBB is considered junk.  You're compensated by taking on more risk in the form of higher yield, but yield and price are inversely related.  So, now w/ interest rates low is a bad time to buy junk bonds b/c in 4 years you could be getting a significantly below market return with significantly more risk than a US treasury.    like the one guy said, it's good to buy when the economy is humming and the fed is raising rates.