Question

If the Fed is cutting rates because the economy is entering a recession should you invest in longer term BB- corporate bonds? List three reasons for your decision.

Answer 1

I would not invest in BB- corporate bonds during the recession even if the Fed is cutting rates, here is why

1) Interest Rate Risks: For long terms, the higher time maturity exposes investors to higher interest rate risks since it becomes extremely difficult to predict the market in the future.

2) Again there have been situations when the rewards of junk bonds don't justify the risks. If we see the yield spread between US T bills and junk bonds they are 4-6.5% above T bills and tend to shrink below 4 %

3) Finally, high-risk bonds perform well when investors are confident and market trends are favorable and yield spreads show potential for further appreciation.

However, there are investors who look for recession opportunities for buying junk bonds which provide low valuation at that time and to look for high returns in long terms. Again finally this comes to the risk-taking capability of the investors