Ask Matt: Are junk bonds garbage?

Oscar the Grouch in his trash can.

Q: Are junk bonds garbage?

A: Junk bonds, or debt sold by risky borrowers, are giving investors the jitters. It’s not time to panic, but rather, understand why they’re not for everyone.

Junk bonds are struggling as investors brace for higher interest rates. If rates rise, some investors who bought junk bonds because they wanted big yields might find decent yields with less risk. The iShares iBoxx High Yield Corporate Bond exchange-traded fund, is now down 14% from its highest point over the past 52 weeks and hitting lows not seen since 2009.

Junk bonds can be appropriate for some investors. Junk bonds are still yielding 5.21 percentage points over government debt instruments with the same maturities. The market is also treating different types of junk bonds differently. Junk bonds with the very lowest ratings are suffering most for the year, says Scott Eldridge, director of fixed income at PowerShares. Higher rated junk bonds had been outperforming by two percentage points. Investors worried about junk bonds don’t have to own then. Junk bonds and stocks tend to move in the same direction anyway, says Diane Vazza of Standard & Poor’s. Many diversified bond funds, like Vanguard’s Total Bond Market fund, doesn’t own junk bonds.

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USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at [email protected] or on Twitter @mattkrantz.

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