Investors have long been advised to shift towards bond funds as they approach retirement, a strategy that has traditionally made both intuitive and practical sense. However, recent fluctuations in the bond market have caused significant losses for many investors. This article explores the reasons behind bond fund losses due to misguided advice from financial advisors and offers insights on how investors can recover these losses.
Haselkorn & Thibaut (InvestmentFraudLawyers.com) is probing allegations that financial advisors might have downplayed junk high-yield bond fund risks. We are seeing a disturbing trend in bond funds sold by financial advisors that are typically low-quality bonds whose portfolios often contain high-income debt instruments, with which 65% are poorly rated or unrated at the BB level.
As a result, although junk-bond funds provide better yields than other types of investments, they are also more prone to economic fluctuations, credit problems, and other unfavorable circumstances.
Many investors are wondering why bond funds have lost value. Bond funds are losing value because the Federal Reserve is raising rates, inflation, and the slowing economy. Most market observers agree that bond funds have been hit hard due to rising rates and inflationary pressures.
The Fed has signaled that it plans to raise rates again in this year. This has sparked fears of a recession, which has resulted in an outflow of investors from bond funds.
In addition, there’s a danger that junk bonds may fail or that any rating organization would keep downgrading them, further driving down their value. During the first nine months of this year, global bond funds faced a cumulative outflow of $175.5 billion. This is the biggest outflow in two decades.
However, many junk bond fund losses may not be the investor’s fault but rather poor advice from a financial advisor.
Our law firm gives free case consultations to investors who bought junk bonds or saw losses in bond funds due from financial advisors. If you or someone you know invested in bond funds with a financial advisor, please contact our attorneys for a free consultation at 1-800-856-3352.
Interest rates hikes destroyed bond values
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Bonds are often seen as a safe investment, but many people don’t realize that they are also affected by interest rates. When interest rates go up, the price of bonds goes down, and vice versa. This is because when interest rates are high, people are more likely to invest in things that will give them a higher return, like stocks. And when interest rates are low, people are more likely to invest in things that will give them a steadier return, like bonds.
When the Federal Reserve increased interest rates, the value of many bonds went down because they were paying historically low rates. Losses ranged from 0.5 to 3% for short-term bond funds, while longer-term funds suffered more pronounced losses of over 30%.
Good financial advisors use a laddering strategy as one way to maximize your gains in a rising interest rate environment. It’s also a good idea to diversify your investment portfolio by focusing on different types of bonds.
In particular, it’s best to look for investments with shorter maturities since the price of these bonds is less sensitive to interest rate changes. Similarly, it’s best to look for bond funds that hold longer-term investments since they benefit from the ability to reinvest dividends.
A ladder of bonds is a good idea if you’re looking for a solid bond investment that pays a higher interest rate. In particular, it’s worth considering Treasury Inflation-Protected Securities, which have a relatively low-interest rate risk.
Unfortunately, many investors were not in bond laddering strategies by their financial advisors and saw massive losses because their maturity dates and interest rates were not diversified. In many cases, these losses are not the fault of the investor but rather the financial advisor.
Real estate sector bonds
Several real estate sector bond funds have been knocked out of whack by the property debt crisis in China. As investors look for ways to avoid the losses associated with the country’s property debt roil, some fund managers have moved on to other markets. In this case, Indonesia’s high-yield debt market has been gaining traction.
While the real estate sector is a big deal in China, it is only a small part of the overall credit market. In fact, real estate’s share of the credit universe is shrinking.
The property debt debacle has led to the widening of the average spread between dollar-denominated high-yield bonds of Chinese developers. Two-thirds of outstanding dollar bonds are now priced below 70 cents on the dollar.
Several developers are trading at distressed levels, including China Evergrande, the world’s largest property developer. As the market continues to suffer, the Chinese government has taken steps to clamp down on developers’ excess leverage.
Emerging markets bonds
A recession and looming rate hikes have hit EM bonds the hardest. While these issues are not new, they have been magnified by deep market anxiety. The geopolitical crisis between Russia and Ukraine has added to the pressure.
EM debt has historically offered higher yields than U.S. Treasuries. While this isn’t necessarily bad, investors aren’t as willing to buy EM debt when things get tough. However, these bonds are often considered less risky than U.S. high-yield debt.
With a recession and a coronavirus pandemic hitting emerging markets, investors were already feeling the pinch. However, Russia’s full-scale invasion of Ukraine put even more pressure on the market. The full-scale military incursion and the Western response added to the risk assets’ woes.
List of worst high-yield “junk” bonds funds for investors
Here are some of the worst junk bond funds with their total returns from mid-April 2022 as issued by Second Chair LLC Principal Chair Mark O. Conner:
- High-bond funds:
- Western Asset SMASh Series Core Plus Completion Fd (-22.02%)
- WP Income Plus Fund; Institutional (-51.97%)
- Pioneer Corporate High Yield Fund; Y (-16.09%)
- Muzinich US High Yield Credit Fund; SInst (-13.30%)
- AXS Sustainable Income Fund; I (-15.28%)
- High-yield closed-end bond funds:
- MFS Charter Income Trust (XNYS: MCR) (-19.01%)
- PGIM Short Duration High Yield Opportunities Fund (XNYS: SDHY) (-18.30%)
- Western Asset Gl Hi Inc. (XNYS: EHI) (-18.47%)
- First Trust HYO 2027 Trm (XNYS: FTHY) (-14.16%)
- High-yield exchange-traded bond funds:
- High Yield ETF (ARCX: HYLD) (-12.85%)
- Invesco GI ST HY Bd (ARCX: PGHY) (-10.31%)
- Tidal: ATAC Credit Rot (ARCX: JOJO) (-11.58%)
- Xtrackers Hi Beta Hi Yld (ARCX: HYUP) (-9.66%)
- Xtrackers JPM ESG HY CB (BATS: ESHY) (-9.84%)
- High-yield municipal bond funds:
- PIMCO Total Return Fund; Institutional (-11.89%)
- Franklin High Yield Tax-Free Income Fund; A (-9.83%)
- Principal Street High Income Municipal Fund; Inv (-10.85%)
- Invesco Rochester Municipal Opp Fund; A (-8.78%)
- Northern High Yield Municipal Fund (-8.51%)
- High-yield municipal bond ETFs:
- Rereview tax Adv Inc (BATS: RTAI) (-12.82%)
- VanEck: Muni Alloc (BATS: MAAX) (-10.74%)
- Franklin ETF: Lib Fed TFB (ARCX: FLMB) (-10.57%)
- Overlay Shs Muni Bd ETF (ARCX: OVM) (-9.54%)
- SPDR Nuv Bbg Muni Bd (ARCX: TFI) (-10.05%)
- High-yield municipal bond closed-end funds:
- MFS High Yld Muni (XNYS: CMU) (-16.78%)
- Pioneer Mu Hi Inc Advt (XNYS: MAV) (-19.07%)
- MFS High Inc Muni (XNYS: CXE) (-19.08%)
- Pioneer Muni High Income (XNYS: MHI) (-19.53%)
- Pioneer Municipal High Income Opportunities Fund, Inc. (XNYS: MIO) (-28.47%)
Identifying over-concentration in the investment universe can be difficult. While it is not necessarily fraudulent, it does raise the risk of investment loss. The best way to mitigate this risk is to diversify your portfolio. For example, invest in a variety of industries or asset classes. This can increase returns while reducing risk. Investing in various investment products, such as mutual funds can also help you diversify your portfolio.
Over-concentration has merits, but diversifying is the best way to mitigate this risk. Investing in various companies and industries can help you increase your returns while reducing your risk. This may be the most important financial decision you make, and it should be done with the right advice.
Using a reputable investment advisor is the best way to maximize your financial resources. However, it is important to remember that there are unscrupulous individuals who prey on the unsuspecting. If you are an investor and suspect you have been scammed, contact an experienced securities attorney to evaluate your case.
FINRA arbitration for bond losses
FINRA arbitration is a legal process used to help investors who have lost money through broker fraud. This is an alternative to filing a lawsuit in a court of law. A qualified FINRA arbitration lawyer can help you receive damages for your losses.
An arbitration lawyer will review the facts and the law to determine how to proceed. Many law firms represent investors in FINRA matters. However, you should hire a lawyer with experience in securities law. You should also find one who is skilled in negotiation.
The arbitration process is confidential, and the parties must follow SEC-approved rules. It is often the most efficient way to recover investment losses.
The process involves filing a Statement of Claim detailing the loss and the parties involved. The statement should also include the theory of liability and the relief sought. The parties must submit a written agreement with FINRA before the arbitration process begins.
The whole process usually takes between 8-18 months to settle. However, often parties reach a settlement before the hearing, which takes as little as 4 months.
After the hearing, the arbitration panel will make a decision. The panel will evaluate the evidence and the arguments presented by both sides. They will make a decision similar to a court’s decision. The award will be sent to the parties within 30 days of the hearing.
FINRA arbitration is a fast, efficient alternative to filing a lawsuit in court. Many investors prefer arbitration to going to trial. However, knowing when to file a claim can be difficult.
If you have financial problems with a broker, you should contact an experienced attorney as soon as you suspect fraud. He or she can help you determine whether you have a claim and whether the process is appropriate for you.
Unsuitable high-yield bond funds
Although these high-yield bond funds have lost considerable value, some brokers still market and sell them to unsuspecting clients. The reason behind this is the high fees and commissions financial investors earn.
Surprisingly some brokers claim that they have fund managers that can manage risk to the client, but that is different. Brokers also tend to dangle the high-yield bond funds’ small yield increase. Retirees and conservative investors should avoid these bond funds.
Haselkorn & Thibaut attorneys are experts in high-yield bond funds and have been helping investors for decades to recover losses from brokers that offered them risky instruments. Investors that suffered losses in junk bond funds should contact the firm at 1-800-856-3352.