By: David Strege
Retirees are desperate for investment income to cover their living expenses. Low interest rates have caused retirees to chase after higher yields in riskier investments. A few years ago this pushed the price of high yield bonds up causing the yields to be lower.The lower yield in our opinion did not substantiate the high risk of default in these lower quality bonds. So we recommended and moved most of our clients out of high yield bonds at that time.
The price of high yield bonds has now been dropping moving the high yield bond index interest rates back to reasonable levels for the higher risk. We are recommending that client’s investment allocations bring high yield bonds back into the mixture. This is still a higher risk asset class than US government bonds as rating agencies put a lower grade on this type of bond because the financials indicate a higher risk of default. This is why allocation mixtures into high yield bonds should range from 0-10% depending upon the person’s situation and risk tolerance. This bond type may also drop more in value than higher quality bonds of the same maturity when interest rates rise.