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High yield bond fund ... not necessary?
Old 06-14-2013, 09:09 PM   #1
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High yield bond fund ... not necessary?

High yield bond funds are equivalent to a mix of a stock fund plus a high quality bond fund. Or are they?
How to Make Your Own High-Yield Corporate Bond Fund - Blog

I seem to recall lots of folks around here have/like high-yield bond funds. I do not own such a fund and really have no intention of owning one.
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Old 06-15-2013, 09:29 AM   #2
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High yield bond funds are not a mix of stock and bond. High yield comes from lower rated bonds. They often, however, act like stocks in that they move with the stock market rather than contrary to the stock market.

Beyond that, I don't find what the blogger has stated to be useful. He mixes S&P 500 with Intermediate term treasuries and says they are the same as a high yield bond fund in terms of return with lower risk. Last I heard, the US Government going back to 1991 never paid a high yield. But it's good advertising for clients.

High yield bond funds can be useful as a percentage of one's bond portfolio, but due to the risk of default, not a large percentage (that's why they pay high yield).
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Old 06-15-2013, 09:51 AM   #3
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High yield bond funds can be useful as a percentage of one's bond portfolio, but due to the risk of default, not a large percentage (that's why they pay high yield).
I think the question is whether it's worth buying them when the argument is that you could get the same result by perhaps changing your equity allocation. It certainly seems from vanguards offerings that their HY wasn't much different than a mix of total bond / S&P 500 (at least for the past decade).
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Old 06-15-2013, 09:56 AM   #4
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I have TRP HY (prhyx) and have had good results over the years. Over a 10 yr period it has outperformed many of my holdings with an 8.4% 10 year average.

As noted, HY funds do not do the inverse of yield like regular bonds; it is a matter of exposure/risk that drives the price.
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Old 06-15-2013, 12:07 PM   #5
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As noted, HY funds do not do the inverse of yield like regular bonds; it is a matter of exposure/risk that drives the price.
This is stated as if it were an axiom. It isn't, and I would not count on it being true at a time like now when credit spread is unusually small.

Everything has to respond to interest rates. It's just that in ordinary times, other issues may dominate the effect of treasury interest rates on a given asset class.

This is not ordinary times, so no telling if high yield will act the way it has tended to historically, should interest rates rise. Which anyway is a proposition, not a known fact at least as pertains to some definite time window.

Ha
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Old 06-15-2013, 12:55 PM   #6
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There are times when it is tremendously profitable to buy junk, and times when you really, really should sell completely out. I believe we are at the latter point in the cycle. Some ideas about when to jump in and out here:

Life, Investments & Everything: Dumpster Diving In The Junk Bond Market – Part 1
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Old 06-15-2013, 02:13 PM   #7
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There are times when it is tremendously profitable to buy junk, and times when you really, really should sell completely out.
This reminds me of the time I sat across the table from a CFA charterholder from Fidelity who told me that HY bond funds were going to be doing great and was insisting that we needed such a fund in our 401(k) plan. I was only slightly amused.

It turns out that when it is tremendously profitable to buy junk, isn't it also tremendously more profitable just to buy equities?

In a 401(k) plan, the fish lump all bond funds together in the "safer than equities" category. Thus when they are not safer than equities that causes a problem.
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Old 06-15-2013, 03:47 PM   #8
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I've got all the risk I can handle in the equity slab of my portfolio. My bonds are used to ease it all out.
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Old 06-15-2013, 07:07 PM   #9
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High yield bond funds are equivalent to a mix of a stock fund plus a high quality bond fund. Or are they?
How to Make Your Own High-Yield Corporate Bond Fund - Blog

I seem to recall lots of folks around here have/like high-yield bond funds. I do not own such a fund and really have no intention of owning one.
I do not own high yield bond funds as an asset class that I allocate a certain % to. Instead, I rely on my diversified bond fund managers to chose when to own high yield bonds and when not. High yield bonds do tend to behave like stocks, so they aren't a good diversifier for stocks.
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Old 06-15-2013, 10:12 PM   #10
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It turns out that when it is tremendously profitable to buy junk, isn't it also tremendously more profitable just to buy equities?
More profitable? Sometimes yes, sometimes no.

I have spent time as a junk/distressed debt analyst, so no doubt my views are not exactly unbiased. I like junk for two very simple reasons. First, it is fairly easy to figure out when to buy and when to sell. Buy when spreads launch over 1000 BP and sell when the bonds trade back to par (or a smidge over par). Equities are a lot harder to figure out when to buy and sell. Second, I like junk because if you are willing to do credit work it isn't rocket science to add return over the index. Credit work is far easier to do than to figure out an equity story.

I sold all my junk a few weeks ago. I am quite happy to stay out of junk entirely for months to years at a time. Every sane junk investor should be prepared to do the same.
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Old 06-15-2013, 10:17 PM   #11
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There are times when it is tremendously profitable to buy junk, and times when you really, really should sell completely out. I believe we are at the latter point in the cycle. Some ideas about when to jump in and out here:

Life, Investments & Everything: Dumpster Diving In The Junk Bond Market Part 1
I'd listen to Brewer at this point. My only junk bond just get called at premium to par, 5 year early. Hard to see much on an upside here.
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Old 06-15-2013, 10:27 PM   #12
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I bought HYG at around $70, during the depths of the Great Recession. Also bought TIP at around $90.

Sold both - HYG at $92, TIP at $120 or so. Miss the yields, but was no longer being rewarded for the risk, in the case of junk, and TIP stopped yielding at all...

Aside from maybe 5% in a total bond market fund, my allocation to bonds is VG's BSV. If junk drops enough, might revisit a 5-10% stake.
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