1. RES-3405-U JUL 2009 Page 1 of 3
U K S t r a t e g y r e p o r t
HigHer rateS USUally eqUal HigHer riSK
Whilst performing well at times in the past, high-yield bonds (also known as ‘junk’ bonds) and high-yield bond funds
have also performed poorly at times. Although high-yield bonds offer higher rates of return, the trade-off is that they
also typically carry higher risk.
Investors Beware: High-yield Bonds Are High-yield Bond Funds Right for You?
Can Have Higher Risk Because of the above-mentioned risks, we don’t believe
You should consider high-yield bonds and bond funds as individual high-yield bonds are appropriate for individual
aggressive-income investments (because of lower credit investors. However, if you find it’s appropriate to own this
quality and higher default risk) when you compare them type of niche investment, despite the risks, consider
to investment-grade bonds. As the chart below shows, high-yield bond funds. The professional management and
investment-grade bonds are rated Baa and above by diversification benefits these funds provide can help
Moody’s or BBB and above by Standard & Poor’s (S&P), reduce some of the credit risks. But owning diversified
which are independent organisations that rate the credit high-yield bond funds doesn’t reduce all risks. In fact,
quality of bond issuers. high-yield bond funds typically exhibit a high degree of
price and income fluctuation. As a result, they may not be
S&p Moody’s appropriate if you tend to be a more conservative investor.
AAA Aaa
There is a false perception among some investors that
AA Aa
Investment Grade rising interest rates don’t negatively affect high-yield bond
A A
prices. In fact, rising interest rates generally do have a
BBB Baa negative impact on high-yield bond prices. However, at
BB Ba times increases in interest rates are accompanied
B B by declining default rates. When this happens, the
CCC Non-investment Grade Caa improvement in default rates typically offsets at least
CC (High-yield or ‘Junk’ Bonds) Ca some of the impact of rising interest rates.
C C Investors usually look for the possibility of greater rates
D of return when they assume greater risk. The long-term
returns of high-yield bonds, however, have been somewhat
mixed despite their higher degree of risk. As the chart
Historically, high-yield bond prices have been volatile, and
below illustrates, investment-grade bonds have actually
their income less stable, than those of investment-grade
performed better than high-yield bonds during the past
bonds. That’s because high-yield bonds default more
20 years.
often than investment-grade bonds. In addition, high-yield
bonds don’t provide the diversification1 benefits that
investment-grade quality bonds can because their returns
Historical annualised returns
tend to be more closely correlated with share prices. Period High Yield Investment Grade
As a result, we recommend you don’t consider high-yield 5 years - 3.9% 2.1%
bonds or high-yield bond funds as a replacement for 10 years 2.2% 4.6%
investment-grade quality bonds in your portfolio. 15 years 4.3% 5.6%
20 years 6.3% 7.2%
Source: Barclay’s Capital High-Yield Index vs. Barclay’s Capital Corporate Bond Index;
data as of 31/12/08. Past performance does not guarantee future results. Performance
does not include payment of any expenses, fees or sales charges, which would lower
the performance results.

2. RES-3405-U JUL 2009 Page 2 of 3
What’s the Outlook? Our recommendation for aggressive-income investments,
The primary drivers of the poor high-yield bond including high-yield bonds, in your portfolio is a range of
performance in recent years include: 0% to 5% of investable assets.
❚❚ A sluggish economy
More Volatility on the Horizon
❚❚ An increase in defaults from record low levels In past years, investors put more money into high-yield
❚❚ Increased investor demand for greater safety bond funds. However, lately this trend has reversed and
more money has flowed out of these funds. When there
Typically we measure the value of low-quality high-yield
are more sellers than buyers, the demand for individual
bonds and bond funds by comparing their rates with
bonds by bond fund managers drops. If this reduced
quality US Treasury bond rates.2 The smaller the difference,
demand persists, it will likely contribute to continued
or spread, between the two rates, the less you’re being
market volatility.
compensated for the increased risk that high-yield bonds
could default — or stop making timely payments of
Average Cumulative Corporate Bond Default Rates
principal and interest. The chart below shows how the
current spread has widened significantly in recent years 52.9%
1981–2008
and is well above its historical average spread of about 5.7%.
33.1%
High-yield Bonds: Spread to US Treasury 19.3%
7.7%
2000 0.7% 1.2% 2.9%
1800
1600 AAA AA A BBB BB B CCC
1400
Spread
1200 Source: Standard & Poor’s
1000
800 Liquidity in the high-yield bond market also has diminished
600
400 recently. As a result, it’s sometimes more difficult to buy
200
0
and sell high-yield bonds quickly, particularly when a bond
is in distress. This also has added to the volatility of
JAN 95
OCT 95
JUL 96
APR 97
JAN 98
OCT 98
JUL 99
APR 00
JAN 01
OCT 01
JUL 02
APR 03
JAN 04
OCT 04
JUL 05
APR 06
JAN 07
OCT 07
JUL 08
APR 09
■ = Historical average spread ■ = Current spread high-yield bond prices.
Basis points spread to US Treasury bonds. 100 basis points = 1%. Source: Barclay’s There are three primary factors driving reduced liquidity:
Capital 01/05/09. Past performance does not ensure future results. Diversification
does not guarantee a profit or protect against loss. 1. The credit crunch and the weak economy
2. Fewer market makers due to mergers, acquisitions and
However, we do not believe that the wide spread indicates
bankruptcies
a buying opportunity. Although annual default rates for
3. Limited exposure by remaining market makers to
high-yield bonds were only 4.1% at the end of 2008,
high-yield bonds due to prior losses
Moody’s expects them to quadruple by the end of 2009.
Higher default rates tend to drive high-yield bond prices
lower. Whilst it may be appropriate for some investors to
own aggressive high-yield investments in the proper
amounts, we don’t believe there is a compelling reason to
do so at this time.
Historical Annual Default Rates for High-yield Bonds
18%
16%
14%
Default Rate
12%
10%
8%
6%
4%
2%
0%
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
(est.) 2009
Source: Moody’s

3. RES-3405-U JUL 2009 Page 3 of 3
The Bottom Line Sometimes it can be difficult to determine whether you own
Keep in mind the following guidelines if you’re considering an aggressive-income investment just by its name, particularly
high-yield bond funds: with a bond fund. On your Edward Jones statement,
❚❚ Be aware that the trade-off for higher rates of return aggressive-income investments are labeled as such.
is greater risk of default and price volatility.
Talk with your Edward Jones financial adviser to help
❚❚ Maintain reasonable expectations.
determine whether these aggressive-income investments
❚❚ Consider reducing your exposure if your long-term
make sense for your situation.
objectives have changed or your portfolio is too heavily
concentrated in high-yield bonds or high-yield bond funds. 1 Diversification does not guarantee a profit or protect against loss.
We recommend that your overall portfolio does not 2 US Treasury bonds are used as the benchmark because the US has a more active and
contain more than 5% aggressive-income investments. developed high-yield bond market.
❚❚ Keep in mind that a weak economy and rising default
rates are likely to have a negative impact on high-yield
bonds in the short term.
Before investing in bonds, you should understand the risks involved, including interest rate risk, credit risk and market risk. The value of bonds fluctuates, and you may lose
some or all of your principal.
Corporate and government bonds are traded on an agency basis. Orders for corporate and government bonds received outside of trading hours, or before 11:00 a.m., will be
transmitted for execution from 11:00 a.m. Please refer to our Terms and Conditions of Business for additional information regarding our Best Execution Policy. Full details about
corporate and government bonds are available from your Edward Jones financial adviser.
Mutual funds (the bond funds, high-yield bond funds and junk bond funds mentioned in this article) are subject to market risks, including
potential loss of principal invested. Mutual funds are offered and sold by prospectus. Before investing, request a prospectus from your Edward
Jones financial adviser, and read it carefully. The prospectus contains more complete information, including a discussion of risk considerations,
charges and ongoing expenses as well as other important information you should carefully consider before investing or sending money.
Edward Jones Limited is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. Registered in England and Wales
No. 3403976. 11 Westferry Circus, Canary Wharf, London, E14 4HH. © 2009.
Mario D. De rose, CFa
Fixed Income Strategist www.edwardjones.com