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Before You Bet on High-Yield Bonds, Read This Comments

  • By DailyWorth Team
  • January 23, 2012

Euro Bonds

Greece. Portugal. Spain. Italy.

Like their art, food, wine (and men), these sultry, volatile countries’ high-yield bonds may seem enticing right now.

A 10-year Italian government bond is currently yielding 6.25%. A Portugese bond? You’re looking at a 14% return.

Meanwhile, here in the U.S., the 10-year treasury note has a tame 2% yield. (That means $10,000 invested in treasuries, would earn a mere $200 in interest annually.)

The higher yield indeed looks tempting, but the associated risk is less sexy: There’s a chance that the countries could default—and not return the money you invested.

“The higher yields mean that almost-broke governments, like Italy and Portugal, have to pay investors (you) more in order to loan them money,” says Scott Tiras, an Ameriprise advisor.

“It’s the risk/return seesaw: You’re taking on the risk that Italy or Portugal will be able to pay back that debt.”

On the other hand, if you buy a U.S. Treasury, it’s a much lower yield, but “you’re making a virtually risk-free investment,” says Tiras.

It's up to you. Wanna play Italian (or Portugese or Spanish) roulette?

Face your fear. Where do you sit, on the risk/reward see-saw?

Tagged in: Investing, How to invest
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