Do not be misled by the temptation of a few extra basis points until you’ve done your due diligence on your margin of safety. On the chart below, you see the spreads of junk bonds (in blue) and investment-grade bonds (in red) over Treasuries. The spread is the difference in a bond’s yield compared to Treasuries. These spreads are measured in basis points (hundredths of a percent). So 100 basis points is 1 percent. Right now, the spread of junk bonds is 107 basis points above Treasuries, while the spread of investment-grade bonds is 99 basis points above Treasuries. Despite the additional risk of junk bonds, investors will only earn about 0.08% more today compared to investment-grade corporate bonds.
Another place you may be tempted to reach for some extra yield is bonds that go on forever. I’m talking about century bonds or even fifty-year bonds. There’s a place for these, but for many investors, the additional yield comes with a level of volatility they may want to fully understand before investing. Longer maturities mean higher duration, and that means larger price changes when interest rates change.
Action Line: When you want to talk about your bond portfolio and risk, email me at ejsmith@yoursurvivalguy.com.
