Should we buy junk bonds?

Jan. 6 (Bloomberg) -- Federal Reserve officials are focused on driving down the spreads between U.S. Treasury yields and consumer and corporate loans, after cutting the main interest rate to almost zero failed to revive lending.

The spread on investment-grade corporate bonds is 6.03 percentage points, down from a record 6.56 percentage points on Dec. 5, Merrill Lynch & Co. data show. That compares with an average of 1.23 percentage points in the previous decade.

Laurence Meyer, a former Fed governor and a founder of Macroeconomic Advisors, said purchases of longer-term Treasuries by the Fed would help keep yields down even as the Obama administration implements its planned fiscal stimulus

Bottom line. There is no doubt the economy cannot function with corporate bond yields at current levels. The Fed will have to do something about it. They will have to buy them aggressively as they did Treasuries.

Should we buy what the Fed is buying? Or is it too early to to buy high-yielding corporate bonds? What is a good risk management strategy?

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George Dagnino, PhD
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Since 1977