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High-Yield Funds Place Different Bets on Energy Bonds

Positioning within the energy sector will play a major role in how these funds will perform in 2015.

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Sumit Desai: After a strong couple of years, the high-yield bond category had a difficult 2014. The category barely squeaked out a gain for the full year, and these calendar results do not tell the full story for the category. Most high-yield bonds declined in the second half of 2014, wiping out the gains from the earlier part of the year.

This decline was driven largely by plunging oil prices, which caused energy-related high-yield bonds to decline almost 13% in the last six months. Energy companies borrowed heavily in the past few years, taking advantage of new drilling opportunities and low interest rates. Just as homeowners borrowed against inflated home prices during the financial crisis, energy companies borrowed this money assuming oil prices would remain above $100 per barrel.

Sumit Desai, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.