BJ Feng: I’m pretty sure David knows more than you about bonds. Under general circumstances and in the long term equities perform better than all types of bonds. We’re not in general circumstances and we don’t know how long one will have to wait to see renewed dividend raises from many companies. Think about a company like GE that is able to scrape along and presents minimal true credit risk, but won’t be increasing EPS or dividends any time soon and can’t afford to do buybacks now that the stock price finally justifies it. Low-priced debt may be a better buy for the next 10 years than volatile equity. People have recognized this trade in GE (stock price still down while debt prices rebound), but in higher-yield companies there might still be some edge to exploit. Of course that’s trading sentiment.

In general terms, although HY does share some problems with bonds AND stocks, there’s no asset class that’s permanently useless. A time when everyone hates high-yield, such as our recent history (in which stocks have been hugely volatile, including to the upside in most people’s memory, and legitimate high-rated bonds have held up pretty well through some equity downturns), is the time to allocate to high-yield. A time when everyone loves high-yield and agrees that it presents the best of both worlds is the time to get out. Overall it’s going to fill the hybrid role decently on a long time horizon.

I think the last thing anyone is worried about right now is their high-yield bonds being called at par. There are plenty of people who would jump at the chance to sell some holdings at fifty cents on the dollar.

Do NOT buy DFR !!!!!!!!!!!!!!!!!!

Once the credit markets improve, stocks will rise, but your high yield bonds will be called away at par. The call provision most high yield bonds have severely limit your upside and make high yield bonds a bad choice if you are looking for a “hybrid” type equity/bond allocation. You would do better just by purchasing equities directly, and then buying short term high quality bonds. That gives you both equity and bond exposure, but with a better risk/reward profile.

P.S., I like TIPS because they guarantee a positive real return and are a good hedge against inflation. Especially unexpected inflation. Real yields were recently above 3%, a great buying opportunity in my opinion.