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Fund Spy: Morningstar Medalist Edition

High-Yield Bond Funds Show Signs of Life

High-yield bonds have shown signs of stabilization, but investors should proceed with caution.

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The surprising failure of Third Avenue Focused Credit in December 2015 left many high-yield bond investors shell-shocked. The collapse highlighted concerns around the lack of liquidity in the asset class. Several credit-oriented hedge funds shut down in the months following the Third Avenue debacle, most likely the result of leveraged bets on some of the dicier parts of the junk-bond market.

As we've written, traditional high-yield bond mutual funds are unlikely to experience a similar fate. But there's no denying it's been a difficult year for even the most conservatively run funds in the space.

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