Warren's Wisdoms- Bond, Junk Bond 4/19/2005
Obviously someone who invests in the bonds of companies with low credit ratings incurs additional risk in doing so. Although the default rate for High Yield (a/k/a Junk) bonds has rarely reached as high as 5% (and is currently less than 2%) we have always felt that their yield should be much higher than the risk-free bonds issued by the US government before we would consider recommending them as investments for our clients.
When we began investing in the High Yield Bond sector about two years ago, the difference between their yields and those of Treasury Bonds was the highest (over 8%) I have seen during the 15 years I�ve been working in the investment world. Currently the �spread to treasuries� has dropped to around 3.5%.
We have enjoyed great success with these investments, but now feel their additional yield offers somewhat less value vs. their additional risk so we have reduced our weighting from about 60% to 25% (of our bond holdings � not total account holdings).
We continue to be concerned about erosion of bond fund share values as interest rates rise (in a measured fashion, we expect), so are not investing in any long-term US government bonds at this time. We have added holdings in the �Convertible Bond�, �Floating Rate� and �Global� portions of the bond market and have changed managers in the High Yield area.
We resist sudden moves into and out of market sectors, but those of you with managed accounts will see changes appear on your statements over the next few weeks.
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