Deposits vs.Bonds

Investors looking for high yields invariably look at high yield bonds, nicknamed junk bonds. [Reverse convertibles are also an alternative but carry equity risk.]

However high yield bonds are notoriously volatile easily moving by 20% a day in value depending on market or political events. The surprising fact is that in the long-term, say 10 years, these junk bonds only marginally outperform investment grade bonds. When one looks at all the high yield benchmark indices that bonds funds compare themselves to, one sees that these indices yield about 5% - 7.5%.

A Nov 2009 article in the Wall Street Journal Are You Too Late for the Junk-Bond Party? discusses the non outperformance of junk bonds in the longer term...

Considering its risk, junk's average returns over recent years have been a mixed bag. Steven Huber, manager of T. Rowe Price Strategic Income fund, points out that when you include their 26% loss in 2008, junk bonds have returned an annual average of just under 6% since the beginning of last year -- the same as top-quality corporate bonds and only a whisker more than Treasurys. Extend the comparison back a full decade and the results are the same: The returns on high-yield bonds have been no higher than those of safer bonds. Of course, the same could be said for stocks. "With hindsight, it's hard to justify having taken any risk over the past 10 years, since it didn't pay off," says Martin Fridson of Fridson Investment Advisors. "Over the long term, you do get paid to take risk. It's a question of how long the long term is for you."

This reaffirms my opinion that in the long-term a 10-year deposit paying 13.35% compounded annually is a significantly superior investment to high yield bonds.