Michael Wagner in U.S. News & World Report: Navigating Risk and Return in High-Yield Bonds
In investing, bonds are often seen as a low-risk, low-reward endeavor. However, it doesn’t have to be that way. Investors hold the power to control risk and return levels with two levers. The first is duration, which affects how sensitive bonds will likely be to interest rate changes. The second is credit quality.
“The bond that you’re buying represents the creditworthiness of whomever you’re lending that money to,” Michael Wagner, co-founder and chief operating officer of Omnia Family Wealth, explains in a recent U.S. News & World Report article. “For example, the U.S. government would be very creditworthy and come with relatively low risk, but also low return.”
As investors venture into lower credit quality options, they’ll come across high-yield bonds, colloquially known as ‘junk’ bonds. These bonds carry an officially recognized elevated risk of default, which means investors may not receive their expected interest payments, or even their principal, if the issuing company goes bankrupt.
“A high-yield bond is like making a loan to a company that might have more risk – the risk that you’re not going to be paid back at all,” Wagner tells the publication. To compensate for the increased levels of risk, junk bond investors can expect a much greater yield, but only when utilized within portfolios effectively.
“I think retail investors should generally access high-yield bonds through a pooled investment vehicle like a mutual fund or ETF,” says Wagner. “It’s very difficult for a regular retail investor to analyze the high-yield bond market, and you really have to do a lot of due diligence and credit risk analysis on these companies as if you were a bank making a loan to them.”