SPDR Barclays High Yield Bond (JNK)
There is a time and place to own high-yield, or “junk,” bonds — or a junk bond ETF such as the SPDR Barclays High Yield Bond (JNK). When spreads between junk bond yields and Treasuries are wide, as they generally are during and after recessions when investors fear default most, junk bonds offer attractive yields and the potential for “equity like” price returns.
But when investors start to chase yield and the spread between junk bonds and Treasuries shrinks — as it did in 2007 — you don’t want to be anywhere near this asset class.
So, where are we now?
Junk bonds are looking a little on the expensive side. The spread has dipped below 4%, and across the asset class, many junk bonds are trading above their call prices, meaning the companies issuing them can legally buy them back for less than the current market price.
So, right now, you’re better off avoiding junk bonds. But if at any point you decide that junk bonds might be a good match for your portfolio, buy them within your IRA account. Bond interest is taxed as ordinary income.