High Yield Bond Funds Rising Interest Rates,Why We Should Care

Thu, Dec 26, 2013

High Yield Bond Income Funds

There are no bad investments, only bad times to make certain investments.

Right now, with interest rates more likely to rise than fall, bonds of all kinds are riskier than they have been in years.high yield bond funds interest rates

However, if you want to be diversified among many different asset classes, you’ll want to invest in the best high-yield bond fund.

Given the market conditions for all bonds, including high-yield bonds, the key parameter in addition to yield will be safety.

To get both safety and yield we recommend a specific type of bond fund that often trades at a significant discount to its market value. This discount provides a buffer against a downturn since, in some cases, you may be paying as low as 90 or 85 cents on the dollar to get into the bond fund.

That’s why the vehicle we recommend to invest in a High-Yield Bond Fund today is called a Closed End Fund (CEF).

A CEF is like most any other fund. It provides you with instant diversification because it’s a fund that buys all kinds of different assets. In the case of a high-yield bond CEF, it buys a number of different high yield bonds.

The combination of these factors make Morgan Stanley Emerging Markets High Yield Fund (EDD) the best high-yield bond fund to buy now.

high yield bonds and interest rates

The fund is a high yield bond CEF which pays a 7.42% annual yield. A breakdown of the high-yielding bond fund’s holdings shows exactly why it can pay such a high distribution rate relative to so many other traditionally high-yield investments which pay as little as 4% to 5% in the current low interest rate environment.

Its largest holding is a Brazilian bond which yields 10%. Its second largest holding is Turkish government bonds 10.5%. Its third largest holding is Polish government bonds which pay more than 5%. Altogether its top 10 holdings are of bonds which pay an average of about 8%.

These high-yield bond investments that it makes are precisely the reason it’s able to pay such a high yield to holders looking for top rated high-yield bond funds.

The fund is able to further increase its high-yield status by using leverage. This fund has a leverage rate of 22%. This means it borrows money to buy 22% more bonds than it already has.

Of course, the leverage cuts both ways. If interest rates decline or the creditworthiness of emerging markets debt improves, the fund will increase even faster in value. The reverse is also true.

The fund also trades at a discount to NAV of more than 15%.

That big discount is a signal most investors aren’t interested. But that’s exactly what gets contrarian investors interested in any investment, even one of the highest-yielding bond funds. The high discount also implies a greater level of safety.

On top of all that, emerging markets are still really out of favor. That makes them cheaper than most other sectors.

As Contrarian Investors know, cheap means there’s less downside risk and greater capital appreciation potential.

The combination of all these factors make emerging markets high-yield funds, like EDD, one of the Best High Yield Bond Fund To Buy Now

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