by Merlin Hernandez

Because of current economic conditions, the use of high yield securities like junk bonds has grown in importance and their issue has increased in maintaining investor leverage. Globalization, mergers, restructurings, and technology partnerships have brought many foreign corporations into the US junk bond market. Because of differences in business cultures and performance measures, many of these firms may not meet the US requirements for investment grade bonds. But these are viable firms that could bring good returns on investments. Furthermore,global economic instability has brought speculation that Treasuries and other government debt securities, which have been described as risk free investments, may not be as safe as once thought. This uneasiness has been compounded by the crisis in European sovereign debt, more specifically Greece, Portugal and Ireland, and the recent threat of default with US government debt. In 2010, Standard and Poors decreased the Greek debt to junk bond status amidst fears of default. In 2011, Portugal’s rating was decreased to junk status by Moody’s. Earlier this year, there was a strong likelihood that that California government securities might become junk bonds unless the state finds a way to refinance its debt.

While not investing in Eurozone debt might be a no-brainer in these times, treasuries and other government securities may no longer be low risk but still be low yield investments. The much riskier junk bond offers a higher yield in the risk-return trade-off. Investors may have different levels of aversion to risk but all investors want some assurance that they can make a profit on their total investment outlay. Treasuries used to provide that assurance while allowing the investor to “gamble” on only a part of a portfolio. But even with the higher risk attached, junk bonds have a real seat at the table these days. The key would be to calculate the risk by hedging the portfolio with a higher classification of junk bond.

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