Federal Reserve Chief, Janet Yellen, warned people in July of the overstated value of junk bonds (bonds with higher yields because they are riskier). Most holders of these junk bonds are retirees, who used the bonds’ higher yields to maintain their lifestyle. Retirees have been investing in riskier assets since the financial crisis. Companies that pay higher yields on their bonds are at greater risk of defaulting.
High-risk, high-yield corporate bond prices have been declining in the past year and a half. Since June, investors have pulled $22 billion out of the market, and prices have dropped by 8%. The decline began in the energy industry when oil prices dropped, alarming investors that companies may not be able to make bond payments.
The extent of the decline means that junk bond investors have made little or no profit for their risk this year. Although investors are still collecting interest payments, the value of their bonds have drastically decreased from $1000 to $920.
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