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Market Volatility: How Have High-Yield Bonds Fared?

With the market volatility of the last two weeks, I've asked my Right Financial Plan co-author Kevin Grogan to take a look at the returns of high-yield bonds relative to other investments. Below are the returns of four Vanguard funds in the two weeks after the S&P downgrade of U.S. treasury debt on August 5:
  • Vanguard 500 Index Fund (VFIAX) -- -6.2 percent
  • Vanguard High-Yield Corporate Fund (VWEAX) -- -2.0 percent
  • Vanguard Intermediate-Term Treasury Fund (VFIUX) -- 2.4 percent
  • Vanguard Intermediate-Term Investment-Grade Fund (VFIDX) -- 0.7 percent
Investors who stretched for yield by purchasing high-yield bonds were punished in a two-week period where their equity allocation experienced losses of 6 percent and their fixed income allocation experienced losses of 2 percent.

Junk bonds or lower credits may seem attractive because of their higher yields, but before deciding to add an asset class to your portfolio you should consider how the asset class fits with the rest of your portfolio. High-yield bonds have a higher correlation with equities than treasury bonds, and this higher correlation makes them poor diversifiers of equity risk. In general, the risks of high-yield bonds tend to show up at the wrong time.

Photo courtesy of Digital Sextant on Flickr.
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