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Here is a chart which shows the credit spread of high yield bonds vs. the default rate of high yield bonds since 1997.
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Until this year, ministries kept around 1 trillion escudos in bank accounts, where they earned a lower rate of interest than the yield on government bonds.
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The argument regarding inflation is almost certainly incorrect, because the yield on the bonds will be greater than the rate of inflation.
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If five-year Treasury bonds are yielding 1.25%, as they were on November 2nd, then a negative 0.55% real yield on inflation-linked bonds implies an expected inflation rate of 1.8%.
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In fact, the rate of return you can earn today on high yield bonds (6.61%) is the lowest absolute yield on record.
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Bonds have an underlying rate of return the yield, or the coupon if you will, when you buy it.
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Finally, realize that even in the current low interest rate environment, short-term, low-yield bonds offer the advantage of liquidity and little downside risk, allowing them to potentially play an important role in your portfolio.
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As default risk is the primary driver of high-yield corporate bond prices, as opposed to interest rate direction, when the economy expands, the risk of high-yield corporate bonds defaulting is reduced and this is reflected in lower volatility.
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Martin Fridson, of Fridson Investment Advisors, says that the default rate on high-yield bonds may climb to 10%.
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The yield on Italian 10-year government bonds - which provides an indication of the yearly interest rate Rome would have to pay to borrow new money - rose to 4.89% from 4.48%.
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Expectations seem to be leaning towards continued low interest rate policies, with the likelihood of the Fed buying more longer dated bonds to keep the yield curve flatlined.
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