Don't Throw Out Your Junk Bonds Due to Rising Rates - TheStreet

Don't throw your high-yield bonds into the junk bin simply because rates are on the rise, says Kevin Lorenz, portfolio manager for the TIAA-CREF High-Yield Fund (TIYRX) - Get Report .

"Since 1996, there have been 16 periods when the yield on the 10-year Treasury increased by more than 50 basis points and high yield has consistently outperformed other sectors of the bond market during these periods," says Lorenz.

The TIAA-CREF High-Yield Fund is up 82 basis points thus far in 2017, according to Morningstar. The $3.4 billion fund has returned an average of 6.3% annually over the past five years, outpacing two thirds of its peers in Morningstar's high yield bond category. The fund sports a trailing 12-month yield of 5.5%, according to Morningstar.

For his fund, Lorenz says he invests across the high-yield universe, focusing on companies that can reliably generate free cash flow. He currently sees value in the mid-tier of high yield, as in single B-rated bonds. Typically, BB-rated issues have the most sensitivity to rising rates, while CCC-rated bonds are most sensitive to investor sentiment and the economy.

Lorenz says credit quality, a major consideration when shopping for high-yield, remains stable and is "underpinned by strong earnings". He also does not see much "low-hanging fruit" in junk bonds after the bounce-back in oil and gas issues helped lift the sector last year.