Caution Rises with Interest Rates for Junk Bonds

As the Federal Reserve has planned to begin raising rates in the summer of 2015, investors are keeping close watch on junk bonds and other risky assets. Stronger economic growth, and a rising interest rate environment in 2015, will negatively impact the prices of riskier assets, including lower-rated corporate debt. Over time, rising borrowing costs could lead to a rise in defaults.

Corporate borrowings have risen to two times earnings as of March 31, compared with 1.76 times at the end of 2010. Investors can benefit by being more circumspect about the bonds they buy since companies with more leverage and lower ratings are typically at a higher risk of default if rates rise.