Priced to PerfectionMost analysts agree that over the last year to 18 months, much of the capital appreciation in the high-yield market has been wrung out. According to the Lehman Brothers high-yield index, the spread between high-yield bonds and the 10-year Treasury bond shrank from 842 basis points, or 8.42%, on March 10, 2003, to 439 basis points, or 4.39%, on March 8, 2004. The tighter spread begs the question as to whether investors are willing to stomach the additional risk involved with high-yield bonds in return for the slim reward of earnings just 4.39% above a 10-year Treasury note, now hovering in the 3.75% range. Morningstar Analyst Scott Berry agrees that the high-yield market is probably "priced to perfection," but in today's low-yield environment, Berry says yield-seeking investors have few alternatives. "You are getting very little yield from diversified bond funds," says Berry. "So just taking home the 6% to 7% yield from high-yield funds may be attractive."
|Littered With Junk Bonds |
U.S. High Yield Issuance (in billions)
|* Through March 12. Source: Bloomberg|