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By Eric Jacobson | 12-24-2009 05:55 AM

Opportunities in High Yield Bonds Dimming

Tepid economic growth and a dramatic narrowing of spreads has reduced the appeal of high-yield bonds, especially lower-quality ones.

Securities mentioned in this video
MWHYX Metropolitan West High Yield Bond M

Eric Jacobson: Talk to us a little bit about what was happening with the portfolio. What kinds of things you and team were thinking about, coming into, say, the latter end of '06 into '07 and the kind of decisions you were making. You kind of touched on this in more specifics here. But give us a broader feel, what was the thinking that went into the portfolio positioning at that point?

Jamie Farnham: It's a good question. As a value-driven manager, we acknowledge that we can't call the top or the bottom, we just have to look at it through a long-term lens. So in late '06, early '07, and even on into the early part of '08, when you looked at the high yield market, and the average spread in the high yield market was in the low 200 basis points at one point in 2007. From a historical standpoint, it was unprecedented. And given the risks inherent in the LBO wave, it just didn't make sense. So we positioned ourselves quite conservatively in that time frame and just waited. Now admittedly, it was a difficult time period for us. There was a bit of lag in our portfolio as we waited for the credit cycle to unfold.

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