Junk Bonds Are Less Junky. But You Still Must Be Careful.

Goldman isn’t as scared of high-yield corporate bonds as some other financial experts (NYSE)

Wall Street is like a department store. There are things you wouldn’t usually buy, but you figure you’ll take the chance because of the cheap price and the hype—like meme stocks. And there are trendy things that everybody’s snapping up—like AI names.

But does the same thing apply to the customers who prefer to play it safe, those fixed-income investors? Should they be looking at riskier bonds?

Goldman Sachs thinks so. The jury’s still out for others.

For Goldman’s Spencer Rogers, high-yield corporate bonds— junk bonds —are now “less junky” than they used to be.

High-yield is probably the safest it has ever been because of bonds that mature sooner, higher credit quality and more secured bonds, which are a bit more stable if a company defaults, said Rogers, who is a credit strategist.

Junk bonds have been a decent investment this year. The SPDR Bloomberg High Yield Bond and iShares iBoxx $ High Yield Corporate Bond exchange-traded funds are up 1.6% and 2.3%, respectively.

But price appreciation for bonds is only one part of the equation.

Fixed-income investors tend to be attracted to junk bonds because of their fat yields, which are much higher than other bonds to compensate for lower credit quality and greater credit risks.

To that end, the iShares high-yield bond ETF has a yield of 5.7% and the SPDR Bloomberg fund has a yield of nearly 6.6%.

By way of comparison, the yield for the benchmark iShares Core U.S. Aggregate Bond ETF is 3.8% and the yield on a 10-Year U.S. Treasury is hovering around 4.15%. A top investment-grade bond fund, the , has a yield of 4.5%.

The spread—the difference—between yields for junk bonds and less risky debt is fairly tight. And that can be a real sign of concern because it shows the willingness of investors to take on more risk for less reward.

Still, Rogers isn’t too worried. He points to yields as the reason why.

“We would counter that, despite tight spreads that are reflective of both the quality of the index and general risk-on appetite, yields are still largely attractive,” he wrote.

Others aren’t nearly as confident.

Cracks are starting show in riskier areas of the market, despite the massive tax and spending cuts enacted this summer and lower interest rates from the Federal Reserve that should keep the economy growing.

And the collapse of used-car dealer Tricolor Holdings and auto parts supplier First Brands in just the past month is a troubling sign—not just about the private-credit industry but about what might be ahead for junk bonds.

“We’re having a hard time finding anything in credit that produces a meaningful yield without a lot of risk,” said Joe Hegener, founder and chief investment officer of Asterozoa Capital Management, which is a subadvisor for the Simplify Opportunistic Income ETF.

“There is voracious demand for any commercial paper that yields in excess of 5%,” he said. “But we’re a little contrarian.”

Mona Mahajan, head of investment strategy for Edward Jones, is also sounding the alarms. She thinks bond investors are better off sticking with investment-grade securities—and many have yields north of 4%.

“We’d be a little more wary chasing higher yield,” Mahajan told Barron’s. “Spreads are so tight, If there is any economic disruption, things could unwind.”

Still, investors don’t have to abandon junk bonds entirely. They just need to be cautious, Ella Hoxha of BNY Investments Newton told Barron’s.

“We still like high-yield bonds over investment grade, but less than we used to,” she said.

Investors should still steer clear of the most junky corporate bonds, said Hoxha, who is Newton’s head of fixed income. She prefers issuers that are closer to investment grade status than CCC credits that have higher default risks.

“There is a concern if the economy hits a rough patch,” she said. “Quality is still important.”

Write to Paul R. La Monica at paul.lamonica@barrons.com