Junk bonds are high-risk bonds. They are rated CCC — barely above default status. They pay higher interest rates because there is risk of default. You may not get your money back.
Bonds are always at risk, because interest rates can rise. When long-term rates rise, the market value of the bonds falls.
In times of price inflation, long-term rates rise.
Today, the Federal Reserve is creating $85 billion a month in fiat money. This is subsidizing Treasury bonds. It is subsidizing mortgages. It is also creating the basis of future price inflation. That means higher rates on bonds. That means falling bond prices.
The rush to buy junk bonds indicates desperation on the part of investors to get something like a decent return on their money. But to get less than 6%, an investor must put his money at risk — high risk.
Investors are saying that they trust Ben Bernanke and the Federal Reserve. They are saying that the FED can create $1 trillion in fiat money from now on, and prices will not rise. Long-term rates will not rise. The economy will recover.
They are saying that digits are real wealth, when digits are created out of nothing to buy government debt.
They really believe this. They are putting their money where their mouths are.
Rates will rise. Here’s why. Bond prices will fall.