Income-hungry investors have long favored high-yield "junk" bonds for the most speculative chunk of their portfolios. Junk securities are any bonds issued by below-investment-grade companies. Because they pose a greater risk of default than high-quality bonds, junk issues must yield more to attract buyers. Lately, junk yields have been pushed higher as investors weigh risk against reward in an aging economic cycle. The average junk-bond yield has risen from a low of 5.4% in 2017 to 6.1% recently, compared with the 3%-to-4% yields of high-quality bonds.
Earnings for All
- 35 Ways to Earn Up to 11% on Your Money
- Short-Term Accounts: 1%-2%
- Muncipal Bonds: 2%-3%
- Investment-Grade Bonds: 3%-4%
- Foreign Bonds: 3%-5%
- High-Yield bonds: 3%-6%
- Dividend-Paying Stocks: 4%-6%
- Real-Estate Investment Trusts: 4%-9%
- Closed-End Funds: 4%-9%
- Master Limited Partnerships: 8%-11%
The risks: History shows that many investors flee junk bonds when a recession hits, and bond prices can temporarily collapse. Some junk funds lost more than half of their value in the recession of 2007-09 before rebounding.
But over the long haul, the bonds' high yields have more than compensated for issuers that go bust. Over the past 15 years, the average junk bond fund has returned an annualized 6.9% in interest and principal gains, compared with 3.9% for an index of high-quality U.S. bonds.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How to invest: If you're worried that the economy will get rocky, stick with a fund that focuses on higher-quality junk bonds. A fund that fits the bill is Vanguard High Yield Corporate (VWEHX, 5.4%), a Kip 25 member. Over the past 10 years, the fund has gained 6.7% a year, on average, compared with 6.5% for the average junk fund. Its current duration is 4.2. Another long-term winner: Fidelity High Income (SPHIX, 5.8%), a fund known for its adept bargain-hunting under manager Fred Hoff. Its 10-year average annual gain is 7.3%, and the current duration is 3.6.
Loomis Sayles Bond Fund (LSBRX, 3.3%) isn't technically a junk-bond fund, but longtime manager Dan Fuss has excelled as a bond picker, particularly in high-yield issues. The fund recently had 30% of its $13 billion in assets in junk bonds. Overall, Fuss is very cautious: He had 33% of assets in cash, the highest percentage ever, and the fund's duration of 3.3 is the lowest ever. Fuss fears that the economy and markets could be at a turning point, especially if a trade war takes hold. Until the risks are clearer, he says, it makes sense to keep a reserve of dry powder.
With the Fed pushing short-term rates higher, floating-rate bank loan funds are worth a look. These funds buy short-term loans that are mostly rated below investment-grade and carry interest rates that adjust higher with market rates. We prefer Fidelity Floating Rate High Income (FFRHX, 3.6%), which takes a cautious approach and skews toward higher-quality debt.
-
Quiz: Do You Really Know How Social Security Benefits Are Taxed?Quiz Social Security benefits often come with confusing IRS tax rules that can trip up financially savvy retirees and near-retirees.
-
Are You Ready for 65? The Medicare Initial Enrollment Period QuizQuiz Turning 65 soon? Test your basic knowledge of Medicare's Initial Enrollment Period (IEP) rules in our quick quiz.
-
3 Ways to Stretch the 2026 Social Security COLA For Your BudgetThree steps retirees can take to stretch the Social Security COLA to fit their budgets.
-
Best Banks for High-Net-Worth Clientswealth management These banks welcome customers who keep high balances in deposit and investment accounts, showering them with fee breaks and access to financial-planning services.
-
Stock Market Holidays in 2025: NYSE, NASDAQ and Wall Street HolidaysMarkets When are the stock market holidays? Here, we look at which days the NYSE, Nasdaq and bond markets are off in 2025.
-
Stock Market Trading Hours: What Time Is the Stock Market Open Today?Markets When does the market open? While the stock market has regular hours, trading doesn't necessarily stop when the major exchanges close.
-
Bogleheads Stay the CourseBears and market volatility don’t scare these die-hard Vanguard investors.
-
The Current I-Bond Rate Is Mildly Attractive. Here's Why.Investing for Income The current I-bond rate is active until April 2026 and presents an attractive value, if not as attractive as in the recent past.
-
What Are I-Bonds? Inflation Made Them Popular. What Now?savings bonds Inflation has made Series I savings bonds, known as I-bonds, enormously popular with risk-averse investors. How do they work?
-
This New Sustainable ETF’s Pitch? Give Back Profits.investing Newday’s ETF partners with UNICEF and other groups.
-
As the Market Falls, New Retirees Need a Planretirement If you’re in the early stages of your retirement, you’re likely in a rough spot watching your portfolio shrink. We have some strategies to make the best of things.
