On this riskier side of fixed income, junk bond funds are now yielding upward of 7 and 8 percent. (Generally, junk bond funds offer higher yields but often come with more risks than investment-grade corporate bond funds.) Payden High Income, for example, currently yields 7.4 percent. An added benefit, Moini says, is the potential for price appreciation (if the underlying bonds prices were to go up in value over time). "Over the next 12 months, you could see high single-digit or even double-digit returns," he says, referring to potential gains among funds that hold junk bonds. Lydon recommends SPDR Barclays Capital High Yield Bond ETF (JNK), which currently yields 10.7 percent. "Equity investors would be happy with that," he says.
The potential for higher yields comes with a fair share of risks. Moini points to two potential scenarios that could be problematic for the sector: A double-dip recession in the United States or more problems in Europe related to sovereign debt in countries like Greece and Ireland. Moini says the team at his investment firm believes the chance for a double-dip recession still exists, but that the probability is very low. He also says he's confident that the situation in Europe is improving.