From investor’s saviour to the devil incarnate and back

High yield bonds tend to conjure up images of the boom and bust 1980s, but the fundamentals for this demonised asset class are currently positive.

The junk bond – also referred to as high yield or speculative grade – market has undergone dramatic swings in investor perception from the early 1980s under Michael Milken, the junk bond market pioneer, to the telecom bubble in 2001 and finally to the large inflows of investments seen in 2003.

During these swings, investor thoughts have ranged from thinking junk bonds offered no risk to believing they were created by the devil. This wide divergence in perceptions reflects a misunderstanding of high yield by a majority of both professional and individual investors.