NEW YORK (TheStreet) -- In the last few weeks markets have reacted swiftly to the threat of the Federal Reserve beginning to "taper" its bond purchases and other accommodative policies. An end to the current Fed policy would result in higher yields and lower prices for bonds and bond funds.To avoid further large declines in their bond fund portfolios, investors will need to seek out more alternatives that have less interest-rate sensitivity. This is where the new PowerShares Global Short Term High Yield Bond Portfolio ( PGHY - Get Report) can help. The fund can own sovereign debt, quasi-government debt and corporate debt. It is a high-yield fund so the credit quality is low. The ratings breakdown allocates 48% to BB-rated debt, 24% B and 21% in C rated bonds. SIRI - Get Report), Chesapeake Energy ( CHK - Get Report) and Ally Financial ( ALFI). Some of the more exotic holdings include Petroleos de Venezuela and Finansbank Turkey. With only 31 holdings, some of which have 4%-5% weightings, a default from even one bond would be a large drag on the fund's performance.
Bond investors face various types of risk including credit risk, which is risk of default, and interest rate risk, which is the adverse effect on bond prices when yields rise. PGHY takes credit risk but reasonably avoids interest rate risk. From the top down, an investor who believes there is still the threat of widespread defaults left over from the financial crisis would not want to invest in PGHY because the fund would indeed be hurt by such an outcome. The current events in the capital markets merit closer attention here for their potential to impact upon PGHY. In May many segments of the bond market declined as investors started to price in a "tapering" of Fed policy. Then, this week, Fed Chairman Ben Bernanke laid out a scenario where quantitative easing could slow down this year and end next year. Follow @randomroger This article was written by an independent contributor, separate from TheStreet's regular news coverage.