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High yield bond outlook

- Alan Lavine and Gail Liberman

Despite several years of strong performance, it's questionable whether high yield or junk bonds will perform well this year.

A lot of factors are working against the high yield bond market. They include narrow yield spreads in relation to U.S. Treasuries, a slowing economy and corporate earnings.

In addition, the volatility of high yield bonds has increased due to leveraged buyouts and mergers and acquisitions, according to recent reports. Plus, the high profile private equity buyouts of Hospital Corporation of America and Freescale Semiconductor resulted in some companies' outstanding bonds being called.

On the plus side, Fitch Ratings reports that the default rate on domestic high yield bonds hit a record low .8 percent in 2006. That's well below the long-term average of 5 percent. Meanwhile, Standard & Poor's expects about 3 percent of high yield bond issuers could default this year. But its research also suggests that default rates will rise. Typically, bond defaults rise and fall in five-year to seven-year cycles. The latest cycle of low default rates is in its fifth year.

Overall, the market still is on stable ground. Investors can pick up high yield bond portfolios that are well-diversified across a wide range of industries with yields about 3 percent more than U.S. Treasury bonds.

In addition, the demand for high yield bonds is strong. Pension funds, corporate bond funds and conservative investors are putting money into high yield bonds to goose their overall average investment yield.

If you do invest in a high yield bonds, stick with a well-diversified bond fund that carries at least a three-star rating by Morningstar (www.Morningstar.com).


Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.

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