What Are The Risks of High-Yield “Junk” Bonds?

Denver Investors May Be Facing Losses from High Yield Bonds  

As the number of COVID-19 cases continues to increase in parts of the US, high-yield junk bonds have been underperforming. 

Not only that, but according to The Wall Street Journal, in early July the growing concern that there may be a bigger wave of pandemic cases coming caused junk bond yields to reach their highest levels in weeks as the high-risk debt “underperformed” in certain credit markets.

Not that high-yield bonds, also referred to as junk bonds or bond funds, weren’t already risky propositions for many retail investors before the COVID-19 pandemic. 

At Shepherd Smith Edwards and Kantas, our Denver securities fraud lawyers represent investors throughout the city and the state against the brokers and their firms that unsuitably recommended this or other investments, causing customers significant investment losses. 

What Are High-Yield “Junk” Bonds?

The term “junk bonds” is usually used by investment professionals to describe risky, high yield bonds or bond funds that are speculative. Investors like the yield that they can garner from this type of investment, as opposed to what they can get from more conservative investment-grade bonds. 

However, high yield bonds are not suitable for every investor. Even when they are, it is important that a stockbroker makes sure that a customer fully understands the terms of their high-yield junk bond investment and the risks they are taking on.

Junk bonds typically pay high-interest rates because their credit ratings (a Ba or lower from Moody’s or BB or under Standard & Poor’s (S & P)) are lower than bonds that are investment grade. Because high-yield bonds are at higher risk of defaulting, they pay a higher yield than these other bonds. 

While start-ups and firms with a lot of capital and high debt-ratio are among the most common issuers of these types of bonds, sometimes the issuers are companies that have bad credit ratings and bonds that have relegated to junk status. Regardless, it is important to remember that these bonds’ ratings were reduced because the credit rating agencies decided that they were already in trouble.

What Are The Risks Of High Yield Bonds?

And while there are the benefits of higher yields and expected higher returns, there are risks, such as:  

  • A high risk of default
  • Greater volatility
  • Risk of the junk bonds being further downgraded, causing their price to plunge in value
  • Restructuring of a high-yield bond as it approaches maturity,  causing this date to be extended. This can prove a high negative for older senior investors
  • Vulnerability to external factors, such as a recession, high unemployment, or COVID-19

Granted, some junk bonds have been known to render high yields quickly. Yet there have also been instances when investing in junk bonds have proved catastrophic. 

One need only look back to several years ago when investors discovered too late that their brokers had overconcentrated their portfolio in junk bonds heavily invested in Puerto Rico closed-end funds. When the US territory’s municipal bonds plunged in value, many investors ended up losing much of their assets, including their retirement funds. 

Junk Bonds Are Unsuitable For Many Ordinary Investors In Colorado

Generally, retirees, conservative investors, and even moderate investors should stay away from junk bonds or bond funds. 

Unfortunately, there are brokers and broker-dealers that have been known to misrepresent the risks involved or claim to be able to properly manage the risks. In the end, it is the investor who ends up having to cope with the losses.

Our Denver investment fraud attorneys can help you explore whether you have grounds for a broker fraud or negligence claim after suffering financial losses. Contact SSEK Law Firm online or by calling (720) 439-2827.

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