Granted, a 5 percent yield might do wonders for a bond fund in this low interest rate environment, but richly-priced junk bonds might also come back and bite investors.
When fears of a global downturn surfaced in the fall of 2015, spooked investors dumped junk bonds and the yield spiked to 8 percent. And when those same fears reached a fever pitch in February of this year, yields spiked again to 10 percent. Those selloffs would have done no favors for the Total Return Fund’s ailing fortunes.
And look at the historical data. The High Yield Index’s average yield has been 9.3 percent since 1996 (the longest period for which data is available), and its current yield has reliably danced around its long-term average yield over the last two decades.
By that barometer, February would have been a fine time to pick up some additional junk bonds, as the then 10 percent yield implied that yields would likely go lower.
That’s exactly what happened. In just three short months, investors regained their risk appetites and yields shrunk. The High Yield Index now yields 7.7 percent -- well below its long-term average yield of 9.3 percent -- which implies better than even odds that yields will go higher.
So, using yields as a barometer, this doesn’t seem like a great time to go shopping for junk. Yes, a 7+ percent yield on junk bonds may provide a brief boost to Pimco’s starved-for-yield Total Return Fund -- but a spike in junk bond yields would further dent the Fund’s performance, and that's a gamble that Pimco can ill afford to take.