Junk Bond Funds Take a Beating

Northeast Investors has a solid record, but you should invest only if you can handle some volatility.

Investors in high-yield corporate bonds received a rude reminder the past two months of why these bonds are called junk. After nearly five years of steady gains, the junk-bond market cracked as a result of concerns about subprime mortgages and general queasiness that too many investors had taken advantage of overly cheap money and borrowed more than they could safely handle. Junk bond mutual funds lost 3% in July alone.

Some called the resulting reaction a "liquidity crisis," suggesting that more and more lower-quality companies were finding it difficult, if not impossible, to sell their bonds. Oddly, this is occurring at a time when the default rate for high yield bonds is well below its historic average.

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Elizabeth Leary
Contributing Editor, Kiplinger's Personal Finance
Elizabeth Leary (née Ody) first joined Kiplinger in 2006 as a reporter, and has held various positions on staff and as a contributor in the years since. Her writing has also appeared in Barron's, BloombergBusinessweek, The Washington Post and other outlets.