Junk Debt Is Scaring Investors
Investors were pouring money into high-yield corporate bonds throughout much of 2016, but worries are rising that corporate debt is overblown.
Everyone from portfolio managers to individual investors have thrown over $6.4B into high-yield mutual funds through the end of August, according to data from Thomson Reuters Lipper, and that wave of money has increased prices and returns, attracting even more investors.
Up until this point, investors have been drawn to corporate bonds due to their high yields, compared to bonds, and lower valuations than stocks, the Wall Street Journal reports. But soaring prices and lower spreads are destroying junk bonds’ ability to generate positive returns despite rising rates, arguably their strongest selling point. On top of that, investors are afraid prices could climb even higher, making the market more volatile if the Fed decides to raise interest rates. [WSJ]