The New York Times says high yield bonds will be maturing in record amounts over the next four years. Refinancing these bonds will cause problems for lower quality companies that took advantage of low interest rates. Will this cause another round of defaults and corporate bankruptcies? In 2012 $155 billion of higher risk bonds will come due and then in 2013 and 2014 another $ 558 billion will mature. This will happen at the same time the Government borrows record sums and interest rates are higher.
Bond investors are complacent. It is the consensus view that interest rates are going higher and yet there is a reluctance to raise cash and shorten portfolio maturities until the increases are immediate. Waiting for confirmation of higher interest rates in the face of this known risk may be one of the most regrettable decisions when looking back over 2010 and this period of economic recovery.
Junk bonds recovered as investors felt more comfortable with the economy and bid up risky investments. This may be an excellent time to look at the yields from these bonds, which are now on par with quality bond returns before the recession, and take some profits. This is an even more compelling decision if the massive maturities on the horizon cause concern – as expected.