With the Federal Reserve on a multi-year mission to keep interest rates as low as possible, investors seeking yield moved out on the risk spectrum from investment grade bonds to things like high-yield (or junk) bonds.
This shift made junk bonds pricier, forcing the risk-reward ratio to become unattractive.
However, with interest rates surging and bonds all over the world selling off in recent weeks, the opportunity to buy junk bonds might be now.
“High yield has been a popular trade for several years given the economic recovery and low default rate,” write the analysts at BlackRock. “With the recent shift in interest rates and the economy still growing, the sector is attractive. Can investors continue to reap returns? We believe so.”
Here’s their chart:
Bond god Jeffrey Gundlach made a similar argument last week.
“The liquidation cycle appears to have run its course,” said Gundlach pointing to junk bonds among other things.
Here’s a slide from Gundlach’s presentation showing how junk bond market may have inflected from its bottom.
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