Elite Investors’ Seven Secrets to Navigating High-Yield Bond Risks
High-yield corporate bonds—often dismissed as 'junk'—present yield-starved investors with tantalizing returns but demand equity-like scrutiny. The smart money approaches this arena with forensic analysis, not credit ratings. Enterprise value and leverage ratios reveal what ratings obscure.
Covenants separate survivors from casualties. Incurrence provisions act as tripwires, flashing early warnings when issuers veer toward distress. Maintenance covenants? Mere historical relics in today's issuer-friendly markets.
Cash FLOW reigns supreme. Free cash flow adequacy separates temporary setbacks from terminal declines. Liquidity sources matter—asset sales evaporate when markets turn, while operational cash flows endure.
Duration arbitrage offers hidden advantages. The naturally shorter maturities of speculative-grade debt provide built-in protection against rate shocks—a feature enhanced with judicious hedging.
Diversification through ETFs mitigates idiosyncratic risk. Liquid instruments allow exposure without the illiquidity premium that plagues individual bond positions.
