High yield bonds sold off sharply as sovereign risk concerns escalated in January and February, but there are no direct signs of heightened credit risk. Valuation, which was arguably ahead of itself at the narrow point in spreads on January 11, is now more than satisfactory for the current default fault. As a result, the total return outlook compares favorably with investors\\\' probable expectations for other asset classes. Asset allocators may benefit from taking a fresh look at high yield.

Returns on defaulted debt do not operate under the same rules as other asset classes. Most asset classes grow fairly steadily, responding to the long-run increase in national wealth. However, in contrast, the amount of defaulted debt outstanding fluctuates widely as a result of variants in the rate of corporate failure. Therefore, defaulted debt returns should be calculated on actual capital invested, rather than by averaging annual returns.

Many institutional investors see only an intermittent role in their portfolios for high yield debt. The asset class, however, shares key characteristics with certain others that institutions have grown accustomed over time to treating as core holdings. Indeed, a comparison between large-capitalization stocks and high yield debt by no means makes it obvious that the former, but not the latter, should be given core asset status.