4 High-Yield Bond Funds To Bank On Strong Inflow

Investors have developed an appetite for high-risk instruments, having bet more than $2 billion on U.S.-based high-yield junk bond funds and more than $2.9 billion on U.S.-based investment-grade corporate bond funds in the past week. Fed’s no-rate-hike decision and substantial progress in U.S.-China trade talks were the major tailwinds driving the weekly inflows.

According to Refinitiv’s Lipper research service data, the $2 billion inflow into U.S.-based, high-yield junk bond funds marks the fourth consecutive week of inflow for the group, Reuters reported. U.S.-based investment-grade corporate bond funds also witnessed a strong inflow after early January.

Federal Reserve’s decision to keep its benchmark interest rates at bay was a crucial reason for this increase in investments in such high-risk assets. The central bank’s decision to freeze interest rates for the rest of this year (currently in the range of 2.25-2.5%) was due to concerns about a global economic slowdown.

The prospect of a trade deal made investors highly optimistic, boosting their risk-taking attitude. After President Donald Trump said last week that he was willing to extend the deadline to delay raising tariffs on Chinese goods, investors rushed to high-yield or junk bond funds.

Per the Reuters report, high-yield bond funds gave an encouraging performance in the first quarter, gaining 6.56%, as noted by Pat Keon, senior research analyst at Lipper.

Why Invest in High-Yield Bond Funds?

High-yield bond funds primarily invest in debt obligations with lower credit ratings. Therefore, the nature of these investments ensures that the funds have higher risks associated with them. This could imply that the company’s financials are risky, and hence offer high returns.

However, just because a company’s creditworthiness is low, it doesn’t necessarily mean that its financials are in bad shape. A company’s lower credit rating could be a result of many factors other than bad financials. A new company that has a weaker track record and financial data for evaluation or a large company that is undergoing a tough phase could be sporting a lower credit rating, but could prove to be an apt investment.

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