NEW YORK (TheStreet) -- For all the talk of a high yield "bubble" set to burst, most bond fund managers are disregarding it as, well, a load of junk.
"There are still advantages there, so we still have an overweight in that space," said Bob DiMella, portfolio manager for the MainStay Tax-Free Bond Fund (MTFCX), adding that the "easy money has been made" in high yield so investors need to be more "tactical".
High yield's most obvious advantage is the extra cash it offers investors in the ongoing low-yield environment. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG), for example, is currently yielding 5.7% compared to 2.5% for the 10-year Treasury note. Considering that yields in the sector were as high as 22% in late 2008, one can surely understand the argument that investors are not pocketing enough premium for the amount of risk being taken.
The HYG sank 2.7% in July, as investors who had streamed into the funds are now worrying if high yield bonds will be the first casualty if the Federal Reserve raises rates sooner than expected due to an improving economy. The S&P 500, by comparison, fell 1.9% over the past month, while the iShares Barclays 20+ Year Treasury Bond (TLT) has jumped 1.3%.
High-yield funds saw net outflows of nearly $1.5 billion for the third consecutive week as investors appeared concerned about valuations in the corporate bond non-investment-grade segment, according to fund tracker Lipper. Investors in July pulled more than $5 billion from junk-bond mutual funds and ETFs.