High-yield bonds could be a good investment in 2008, as investors shake off their aversion to risk.
Junk just ain’t what it used to be.
Year-to-date through November 15, high-yield bonds put up a total return of only 3%, at a time when Treasuries had a total return of 7.7%. The relative outperformance of Treasuries can be attributed to the “flight to safety” undertaken by many investors in 2007.
But in 2008, many market prognosticators are expecting a much better year for high-yield bonds.
An intriguing analysis by T. Rowe Price and JPMorgan shows that so-called “problem” industries (housing, financial services, retailers, and consumer products) represent only 13% of the high-yield asset class. The sectors that represent the most (energy, utilities, and health care) “should be resilient even if the economy slows,” says Mark Vaselkiv, manager of the T. Rowe Price High Yield fund.