Are Junk Bonds Being Hit Too Hard? (JNK, HYG, PHK, MSY, HIO, HYV)

Bonds of the Treasury variety may be the safe haven against a falling stock market.  They hardly pay anything in yield, but they haven’t yet faced a meltdown. The woes of Europe, the slowing BRIC economic growth, and now the slowing U.S. economy is bleeding over into the risk assets.  Holders of risk have been unloading stocks, but now even the high yield bond sector is getting walloped.  After these high-yield and junk bonds have hit recent highs in price, the shares have come crashing down with the biggest one-day losses being seen on Thursday.

The question here is simple… Are junk bonds being sold off by too much?

In many cases the high yield junk bond sector is like investing in equities.  Unlike Treasury bonds, for now at least, junk bonds carry credit risks that the bond market does not.  The difference is that you can easily find dividend yields of 7%, 8%, and even higher.

iShares iBoxx $ High Yield Corporate Bond (AMEX: HYG)- was down 1.4% at $87.59 against a 52-week $77.90 to $92.67.  The indicated yield here is 7.25% based on the last payment.

SPDR Barclays Capital High Yield Bond (AMEX: JNK) was down 1.3% at $38.19 against a 52-week range of $34.09 to $40.89.  It had a 7.2% indicated yield based on its last payment.

PIMCO High Income Fund (NYSE: PHK) was down 0.9% at $12.64 against a 52-week range of $10.52 to $14.88 and its yield was about 8.3% based on the last dividend.

Other closed-end funds were down 3% and more on Thursday:

Invesco High Yield Investments Fund, Inc. (NYSE: MSY) was down close to 3% at $6.07 against a 52-week range of $5.25 to $6.83 and with an 8.8% yield.

Western Asset High Income Opportunity Fund Inc. (NYSE: HIO) was down over 3% at $6.11 against a 52-week range of $5.34 to $6.58 with a yield of close to 8.4%.

BlackRock Corporate High Yield Fund V, Inc. (NYSE: HYV) fell by over 3.3% down to $12.02 against a 52-week range of $10.10 to $13.13 with a yield of 8.6%.

When you get a free fall on these you often cannot ever catch the ultimate bottom all at once.  In fact, the performance of these during the recession and during certain times of panic selling as we have seen in each of the last two summers has been dismal.  The trick is the timing.  Rewards usually await for those who catch junk bonds after they start to bottom out.

JON C. OGG