Holding Junk Bonds or Treasury Bonds

Junk bonds give an advantage in interest return over U.S. Treasury bonds. The government issue is the best grade available and the corporate variety is of lower rating.

The spread of return between the two makes up for the risk; the difference varies all the time; it may be as low as 2% or 3% points at times or as high as 20% points as it was in mid-2008.

The spread depends on the outlook for the economy, the predicted default rate for the lower-grade issues, which is built into the pricing, and other economic conditions.

The question? Is the risk worth taking? Many times it is. When you examine the extra return and factor in returns AFTER diversifying the risk. You diversify with low-cost mutual funds, particularly when you use smart duration principles.(See the Earl J. Weinreb News hole(r) Commentaries.)