Why I Like High Yield Bonds Essay

312 WordsJul 26, 20112 Pages
Why I like High Yields Bonds 1. Defaults LOW-now & and in the forseeable future are not a significant factor: * Fundamentals-reduced expenses, reducing debt(deleveraging), Diluting stock holders to raise capital-beautiful environment to service debt. “Companies are not expanding they are maintaining” “We have one the best credit quality periods in the HY space U.S. History” 2. Liquidity controlled-Keeping maturities shorter- Having the ability to move out of positions more easily is controlled by shorter maturities. This also helps reduce the effect of interest rate hikes. “We like modest inflation because of our shorter duration-as bonds roll off we can reinvest at better yields” 3. More predictable returns with reduced volatility: * Promise to pay * Increased claims right on company(better than stock, preferreds)-Have been increasing our senior secured positions.-now @35% * In Jan. 2004 the HY prices were a few percent higher on the index than they are now and the return on the index(Merrill Lynch HY Master) in 2004 was 10.76%. * In the last 25 years the index has had 20 positive years and only 5 negative. With a 25 year period return of over 9% * From 1992 thru Jan 1 2009 the standard deviation of HY bonds has been ½ of the SD of the S&P 500(source factset) 4. Non-coorelation to U.S. Treasury * As interest rate rise treasury prices increase and yield declines-our shorter term portfolio enjoy the strength of a growing market and modest inflation. 5. Misc… * Avoid HY bond mutual funds as the ability to hold onto bonds by the manager is often dictated by the outflow of money from the fund(redemptions). * Avoid HY funds as a hugh influx of cash my cause the managers to purchase less than desirable bonds to fully allocate the portfolio (reduce the credit quality of the

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