SEARCH FOR YIELDS Issue 3, October 24th
"Junk" in bond markets is a bond that is offering very high interest rates. For example, if you are earning just 3% to 4% on fixed deposits, junk bonds will offer rates of well over 10% and can go all the way up to even levels of over 20% to 25% in a few cases.
The reason why junk bonds offer way higher interest rates than what you can get in the market is due to the perception that these bonds are risky because of their poor underlying financial strength to pay interest and return principal on time.
So, if this is the case where there is high risk of not getting your capital back, why does a market for junk bonds exist?
Why do Investors invest in junk bonds?
Three reasons - 1. Returns are high 2. Perception of undervaluation and 3. desperation
Investors are always searching for higher returns than what is available in the market and are willing to take extra risk to earn the returns.
There are times when markets turn dysfunctional such as times of 2008 global credit crisis and 2020 pandemic and bonds turn into junk temporarily until it returns to normal on policy makers actions. Very low interest rates force investors to high return bonds that are risky.
Junk bonds will stay in flavor
In India and across the world, interest rates are at the lowest ever. The pandemic has forced RBI, Fed, and other central banks to cut interest rates and keep them at very low levels for a long period of time. Given this scenario, with bank deposits earning close to nothing, there will be a lot of investments in junk bonds. The increasing investments in junk bonds will lead to many companies with not so sound financials issue bonds. Bond arrangers and wealth advisors will promote junk bonds as it finds flavor with investors.
And like any bubble, dot.com bubble for example, the junk bond bubble will burst. But that time is still not on the far horizon yet.
Information herein is believed to be reliable but Arjun Parthasarathy Editor: INRBONDS.com does not warrant its completeness or accuracy. Opinions and estimates are subject to change without notice. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The financial markets are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved. Unauthorized copying, distribution or sale of this publication is strictly prohibited. The author(s) of the content published in the site INRBONDS.com may or may not have investments in the assets discussed in the pages/posts.
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