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By Cara Esser, CFA | 05-05-2011 10:25 AM

Still Runway for High-Yield and Bank Loan Funds

Given an improving economy, corporate fundamentals, and current valuations, there is still value in the high-yield and bank-loan marketplace, says Western Asset's T.J. Settel.

Cara Scatizzi: Hi, I am Cara Scatizzi, a closed-end fund analyst at Morningstar. I am joined today by T.J. Settel, a portfolio manager at Western Asset.

T.J. specializes in bank loans and high-yield bonds. Thanks for joining me T.J.

T.J. Settel: Thank you, Cara.

Scatizzi: TJ, what's been going in the bank loan and high-yield bond market?

Settel: Well, it's kind of interesting times right now. We're in a period right now where we had great returns over the past two years, and people are kind of questioning what the returns are going to look like for the next six to 12 months.

We right now are still in favor of the asset class. We're looking at some of the strength that's in the asset class such as the economy that we think continues to improve. Corporate fundamentals that continue to improve. Valuations that we still think offer attractive valuations, and default rates that are going to continue to go down. So we're still in favor of the asset class.

Scatizzi: What did the first quarter look like for this asset class?

Settel: Well, year-to-date high yield is up about 5.5%, which has been a very strong return. We were looking for about 8% to 10% return for the year. So we're more than half way through what our target is, but for the remainder of the year if you get 4.5%, 5% that's still going to look at versus other asset classes, and loans are up about 3.3%, which is right on schedule for our full-year target return of about 6% to 8%.

Scatizzi: And you said that you still see value in both the bank loan and the high-yield market. Where specifically do you see some of those valuable opportunities?

Settel: So we still like the lower end of the credit spectrum. So, CCCs are still fairly attractive. Not nearly as attractive as they were two to three years ago, but they still offer some value.

We still like the upgrade candidates; we still think that there's going to be continued M&A and takeout of high-yield names and that those names that are taken out will continue to trade up.

Within the bank loan space, we're finding more value in the new-issue calendar versus the secondary calendar where you are getting about LIBOR plus 4.50 with a one and a quarter floor, and a nice dollar discount, and then you have obviously the floating rate of interest.

Scatizzi: And can you tell us a little about the close-end funds that Western Asset manages?

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