The 2020/2021 lockdowns had an unexpected positive impact on the high-yield corporate-bond market, making these so-called “junk bonds” too big to fail. Investors are realizing the opportunity to earn historically large and stable dividends from corporate-bond funds like the PIMCO Dynamic Income Fund (PDI), which offers a 13.8% yield, growing dividends, and regular special payouts. Managed by PIMCO, a top CEF manager in fixed-income, PDI has seen significant gains in recent months.
The performance of corporate-bond funds like PDI has disproven the perception of junk bonds as risky investments. The SPDR Bloomberg High-Yield Bond ETF has risen over 10% in five months, with PDI showing a 30%+ gain in the same period. Despite initial market skepticism, PDI has delivered strong returns supported by its high-yield bond portfolio. The market has recognized the value of these assets, leading to significant capital gains.
Junk bonds, once considered high-risk investments, have evolved into valuable assets. Initially introduced in the late 1970s as a way for struggling companies to raise capital and investors to earn above-market returns, high-yield corporate bonds faced challenges in the late 1980s and early 1990s due to high inflation and market changes. However, the Fed’s intervention during crises like the subprime-mortgage meltdown in 2009 and the COVID-19 pandemic in 2020 has stabilized default rates and increased confidence in junk bonds.
Investors’ fears of a spike in defaults in 2022 led to a sell-off of junk bonds, resulting in oversold assets offering significant discounts. The market has since recognized the benefits of high-yield bonds, including high yields, a strong US economy, and continued Fed support. The $2 trillion junk-bond market now comprises about 20% of the total corporate-bond market, emphasizing its importance and too-big-to-fail status.
The PIMCO Dynamic Income Fund (PDI) stands out for its investment strategy in credit assets correlated with junk bonds, special dividends, and a history of growing payouts. Despite not fully recovering from the 2020 market downturn, PDI has become particularly attractive in recent months amid increasing investor interest in junk bonds. The fund’s ability to generate income without cutting payouts and to offer special dividends has made it an appealing option for income-seeking investors.
Overall, the market’s rediscovery of junk bonds as valuable assets has benefited funds like PDI, which have outperformed expectations. Investors are now realizing the potential returns and stability offered by high-yield corporate bonds, challenging the traditional perception of these investments as risky. With the support of the Fed and a strong market environment, junk bonds have become a favorable option for income generation and capital gains in the current economic landscape.
