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Investors are piling into high-yield bonds. What to know before adding ‘junk’ to your portfolio

  • With a recent influx of money pouring into high-yield bonds, financial experts urge caution before piling in.
  • High-yield bonds typically have greater default risk than investment-grade bonds because issuers may be less likely to cover interest payments and loans by the maturity date.

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Investors have been pouring money into high-yield bonds, which typically pay more interest for taking on greater risk. But these investments are also known as "junk bonds," and financial experts urge caution before piling in.

After a rocky start to 2022, U.S. high-yield bond funds received an estimated $6.8 billion in net money in July, according to data from Morningstar Direct.

While yields have recently dipped to 7.29% as of Aug. 10, interest is still higher than the 4.42% received in early January, according to the ICE Bank of America U.S. High-Yield Index.

However, junk bonds typically have greater default risk than their investment-grade counterparts because issuers may be less likely to cover interest payments and loans by the maturity date.

"It's a shiny metal on the ground, but all shiny metals are not gold," said certified financial planner Charles Sachs, chief investment officer at Kaufman Rossin Wealth in Miami.

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While some say default risk is built into junk bonds' higher yields, Sach warns these assets may act more like stocks on the downside. 

If an investor feels strongly about buying high-yield bonds, he may suggest a smaller allocation — 3% to 5%, for example. "Don't think of it as a major food group within your portfolio," he added.

Rising interest rates may be risky for high-yield bonds

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