Investors have now been faced with a long period of very low yields on high-quality bonds. As a result, and as a consequence of the Federal Reserve’s easy monetary policy, many investors have chosen to pursue higher yields by taking credit risk. This has occurred despite historical evidence that only a very small default premium has existed. What’s more, this premium has been small even before considering transaction costs.
My colleague and co-author, Kevin Grogan, recently took another look at high-yield bonds and shows once again that investors have not been well rewarded.
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