With interest rates near zero, income investors have been pouring money into junk bonds at an alarming rate.
JNK, see above chart, is one of the more popular ETFs and has grown to over $5 billion in assets. With an average daily trading volume of almost $90 million, it’s a snap to get into or out of the market with lightening speed.
The current juicy annual 10.8% yield makes this a tempting proposition. Given the fact that the Fed is lurking in the background with its QE-2 gun cocked and ready to fire, low interest rates are indeed here to stay for a while, at least until the comatose economy starts to show signs of life.
This should bode well for prices of junk bonds for the time being. However, do not become complacent and prepare yourself now for an eventual exit. This may be some time down the road, but it only takes a few minutes a day to set up and track your trailing sell stops. Once interest rates start to head higher, and bond prices head south, you will thank me for having a plan in place to deal with a sudden change in trends.
The use of Sell Stops was a hot topic on this blog last year. In case you missed the Q & As, I have compiled them in a free e-book, which you can download here.
Disclosure: No holdings