The credit crisis has hit bond funds hard. Even investment grade corporates (LQD) have spiked lower in the last few weeks. LQD is yielding 5.5% and is selling at a small discount to NAV. Junk bonds (COY, CYE) are yielding 14-15% and are selling at a 20% discount to NAV. (See the chart above.)
The COY/LQD ratio is below the level of six years ago. (See the red line on the chart above.) Are we approaching the time to begin buying junk bond funds? The junk bond funds have a higher correlation to the stock market than to the investment grade bond market. When the markets begin to stabilize, junk bonds will greatly out perform the investment grade bonds. Note the move up in COY/LQD from 2002-2003 in the chart above. Is a yield of 15% and a discount of 20% enough compensation for the risk of beginning to buy now? Or, is the better course to begin buying the investment grade bonds?
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