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What Are High-Yield Bonds?

Friday, Feb 26, 2016

The municipal bond market has always been a valuable financial market for investors in search of a dependable, tax-free, and relatively low-risk stream of investment income. High-yield bonds offer a nuanced option within the muni bond market. For those who still want all the benefits of municipal bonds, but who have a higher risk tolerance and a long time horizon, high-yield investing offers an attractive opportunity to capture a higher return.

A Closer Look at High-Yield Bonds

Before investing, it is important to understand precisely what high-yield bonds are, the benefits and risks, and how they are taxed. The bond specialists at GMS Group can offer insight into high-yield bonds, ensuring that the best possible investment choices are made according to the investing style and specific objectives of the investor.

Associated Risks

High-yield municipal bonds are debt obligations issued by states, cities, counties, and other government entities, but unlike other muni bonds, they are not rated as investment grade by the major credit agencies. The high-yield market comes with specific risks that investors should be aware of.

  • There is a higher risk of default; for example, from 1970-2011, 0.8 percent of high-quality muni bonds defaulted while nearly 8.0 percent of muni bonds below investment grade defaulted
  • High-yield bonds are more sensitive to downturns in the economy
  • The high-yield muni market is a small segment of the municipal bond market, meaning lower trading volumes and less liquidity for investors interested in trading individual securities

Associated Benefits

Without a high credit rating, high-yield bonds must offer a higher interest rate in order to attract investors away from the investment grade market. For investors with a particular investment style and set of objectives, the benefits of high-yield investing make this market very appealing.

  • A higher yield translates into a potential for greater investment income earnings
  • For investors with a long-term investment horizon, the higher returns over time can significantly impact the growth of a portfolio
  • High-yield bonds can be used to diversify an investment portfolio that has a high concentration of high-quality bonds or other low-risk investments

Tax Rules for High-Yield Bonds

As with most other municipal bonds, high-yield muni bond interest is not subject to federal tax. The interest may or may not be taxed at the state and local levels. Capital gains, if any, are subject to tax. This provides investors with a very unique investment option, with tax advantages, as well as a significantly higher rate of return and greater potential for investment income than that which can be found in the rest of the bond market. There are many benefits within this highly specialized market, as well as a specific risk set. The GMS Group bond specialists can help investors navigate this market with a goal of optimizing an investment portfolio and maximizing their potential.

Ready to learn more about high-yield bonds? Let the bond specialists at GMS Group help you make the best investments so that you can meet your financial objectives! Contact us today for assistance or call 877-457-0070.