Brutto

Why Buy High Yield Bond Funds?

The problem for many high yield bonds now is not just the default rate (where anyway every fund manager will argue that he has "unique insights" in picking solid businesses) but refinancing risk - the borrowers can pay interest, but the principal of many of the recent bond vintages cannot easily be repaid from company cash flows: the bonds were placed in the expectation that they could be redeemed by replacing them with abundant cheaper finance a few years down the line, or in conjunction with IPO's of the borrowers.

So crunch time is delayed until the final redemption date. Investing now is a bet that credit conditions will get back to where they were: your call if you think this is likely, but many borrowers don't really have a plan B.