High-Yield Bonds Work for a Flip or a Hold

It is no revelation that corporate high-yield bonds (as an asset class) had a tough 2008 -- the defaults of both Bear Stearns and Lehman Brothers sent investors and lenders fleeing from riskier corporate credits; corporate high-yield mutual funds and ETFs saw declines in 2008 of between 30% and 40%, comparable to equity market losses.

Whether for a quick trade or for a longer time horizon, I believe corporate high yield is a place to allocate some money presently, and it deserves a spot in a diversified investment portfolio. With our clients, we avoided the corporate high-yield bond market completely after 2005, selling our junk bond funds as credit spreads returned to historical norms following the dramatic widening in 2001 and 2002, but we returned too soon to the market in 2008, allocating money back into corporate high yield after the Bear Stearns default.

Two vehicles we are using to get clients exposure to the corporate high-yield bond market are the iShares iBoxx $ High Yield Corporate Bond (HYG - commentary - Cramer's Take) ETF and the SPDR Barclays Capital High Yield Bond (JNK - commentary - Cramer's Take) ETF.

In a recent Columnist Conversation post, I gave readers a heads up as both ETFs approached the fall 2008 lows. Both of the following charts look similar in terms of their recent pullbacks -- worries about Ford's (F - commentary - Cramer's Take) and GM's (GM - commentary - Cramer's Take) debt being converted to either equity or preferred stock, or recapitalized entirely, have roiled the corporate high-yield bond market considerably in the last month.

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At the time of publication, Gilmartin was long HYG and JNK, although positions may change at any time.

Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.