High-Yield Bonds Hit a Few Bumps, But Still Appeal to Risk-Takers

“Junk” has been the jewel of the bonds world, but are yields still attractive?


Against an uncertain backdrop, Payden's Moini expects a range-bound 10-year Treasury yield of 2 percent to 2.5 percent; longer-duration, higher-rated corporates around 5 percent; and higher-quality, high-yield bonds to range somewhere near 6 percent to the low 7-percent range. Bond fund investors may well remember the double-digit yields that junk bonds and funds traditionally pay. Those days are in the past, for now, putting pressure on fund managers and investors to be selective in the high-yield sector.

There is risk, but "you also collect a juicy coupon that will help cushion you from rate volatility. In a rising-rate environment, when that day does come, high-yield is less exposed," says Moini. He equates higher-quality, high-yield fund investing as "equities light." Investors might move into company-issued bonds and shares based on strong company fundamentals, but with bonds there is less volatility, he says.

As for potential areas of investment, Prudential's Collins says the fundamentals of large U.S.-based banks such as Bank of America and Goldman Sachs are healthier than they've been in decades, partially due to the post-crisis regulatory house-cleaning. Investors can't entirely dismiss potential global-market contagion backlash because of European banks' sovereign debt exposure (the ratings agencies clearly aren't ignoring this), but new demands on U.S. banks to hold more capital help offset global risks.