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Loomis Sayles Bond Fund Co-Manager Kathleen Gaffney and Vanguard Chief Economist Joe Davis debate the benefits and risks of investing in junk bonds.
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Has been the busiest August on record for global corporate bond issuance and investors -- to be piling -- to get this high yelled.
And junk bonds yes I said junk bonds jumped -- is a low grade bond.
That may be issued by companies.
Without long track records or with questionable ability to meet their debt obligations so risky maybe I don't know -- should you -- the crowd at some junk bonds your portfolio or.
Is there distribution got there well we've got to the Smart people who business debate this forest today Kathleen Gaffney is Loomis Sayles bond fund co portfolio manager.
-- Davis as Vanguard's chief economist Kathleen I wanna start with you you -- the idea.
A junk bonds -- go back twenty years in here that your head you think junk bonds you know Malcolm what number.
What play this way today for our viewers.
Junk bonds or high yield bonds and I emphasize yields are attractive today.
Because that yield advantage with rates so low.
It's a good time to find -- source that gives you additional income.
-- challenge is the credit risk that you're taking but now is a great time to take that risk because the fundamentals are so positive.
Because I'm from because it probably do better junk bond I'm -- -- I might do in treasuries at this point joke real wary though junk bonds and why sell.
Why I think we're -- -- you you know isn't Kathleen mentioned you know importantly just the credit quality.
But the -- underlying securities or issuers of high yield dad and then why I'm I'm I'm somewhat concerned just in terms of the health.
Of that market relative to say broader corporate America I mean.
They're higher yielding instruments for a reason that's because of the implicit risk and -- your ride for their securities and you know just given the low level of of a stock market volatility.
That we see salt of the past several -- and somewhat concerned at least some investors may be reaching for yield.
And not taken some -- the apparent risks under consideration.
-- tell let me ask give us some company is that have actually issued beg you to consider -- -- -- -- junk bond CIT group United Rentals -- mean these -- companies that are that is happen to have.
For whatever reason right now thanks in the business and paid.
They've got the lower ratings but at the same time you know it might be somewhat of an attractive proposition for some people why would you advise and against taking that risk.
Why I think again you have to look at what what what -- this this allocation would would do relative to -- broader portfolio I mean for many investors.
Listening today they may have exposure to the stock market is well and and in -- even know high yield or junk bonds are are by definition a fixed income security.
There are month to month and year to year.
You know book correlation over time will be very high with the stock market any correlation closer to one.
And so I think these have to keep that in mind -- if I found looking at relative attractiveness of the financial markets I have a release over a long period of time I have a little more confidence.
In equities despite their volatility rather than say you know low rated.
Corporate debt.
OK -- has given assuming a -- transfered to Europe's embryonic edge up off a cliff do you wanna come I'd say I don't think -- but that's -- -- from investors.
In August and this is the most activity we've seen in the junk bond space frankly since like 95.
Do you think it's above all do you think that people are just kind of chase and something because of their other friends are -- -- right now.
Well it is a very crowded trade because people are looking for income and where else do you -- So yes a lot of people have been jumping -- too high yield bonds however.
Again I emphasized that that -- damage is really key.
And when you compared to stocks yes there is a similar correlation.
However high -- because of the high coupons.
Actually has lower risk and less volatility relative to stocks so right now when I compared both of them.
I would opt for high yield and that additional income protect question about -- before -- cast blame.
How much in my portfolio percentage why should I put in a junk high yield bond.
I would say depending on your time horizon.
Somewhere between five to 10% by the -- percent -- what do you -- Why I I think I think that's a good you know starting point -- if you look at the high yield market 5%.
-- Barkley -- yeah which is an investment grade broad benchmarks I think going any higher than that we would just -- really take.
You know risk in the consideration.
Okay okay see about the -- is about last point that's what I think by five percentage points anyway.
Kathleen Gaffney Joseph Davis thanks to both the -- appreciate it.
