This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

High-Yield Bonds, After Rally, Keep Appeal

Stocks in this article: STIAX ICMBX EAT PVH FPACX

NEW YORK ( TheStreet) -- After suffering crushing losses in 2008, high-yield mutual funds have rebounded sharply.

Last year, the funds returned 47%, and this year they have tacked on another 5.5%, according to Morningstar. After the record rally, are high-yield bonds still appealing? Yes, says Joe Balestrino, manager of Federated Strategic Income (STIAX). "The fundamentals for the high-yield market are sound, and the valuations are still fairly cheap," he says.

High-yield bonds are rated below-investment grade. Because of their extra risk, the bonds yield more than investment-grade securities. When the markets froze in 2008, high-yield bonds yielded 20 percentage points more than Treasuries as panicked investors demanded steep yields to compensate for what seemed to be enormous risks of defaults. Since then, markets have calmed. Now the bonds yield about 7 percentage points more than Treasuries. That is well above the historic average spread of 5 percentage points.

The spread is still high because investors are nervous and fear the default rate will spike above the historic average annual rate of 4%. But the current default rate is only about 2%. If conditions persist, investors will collect double-digit yields on their bond portfolios and suffer only minor losses from defaults.

Balestrino of Federated argues that default rates will remain muted for some time. He says shaky companies already defaulted during the recession and those that survived the downturn are in sound shape. With the economy growing slowly, most high-yield companies should have enough cash to maintain their interest payments. "The marketplace cleansed itself during the recession," Balestrino says.

Federated Strategic Income holds a mix of securities that includes foreign bonds, government isssues and high-yield bonds. During the past five years, the fund has returned 6.9% annually, outdoing 86% of its peers in the multisector bond category, according to Morningstar.

When Balestrino is in his neutral position, he has 40% of assets in high yield. Because he is bullish these days, the fund has 48% of assets in high yield.

For a tame way to own high-yield bonds, consider Intrepid Capital (ICMBX), a balanced fund that keeps about 20% of assets in high-yield bonds and the rest in cash and small-cap stocks. During the past five years, the fund returned 6.4% annually, outdoing 99% of its peers in the moderate allocation category, according to Morningstar.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs