Blackstone High-Yield Public Venture

Investors seeking yield in junk bonds will have another option. GSO, the $37 billion credit manager that’s part of Blackstone Group, is preparing a high-yield investment vehicle. It is expected to be listed on the New York Stock Exchange.

A huge amount of money came into junk bonds because investors want yield while the Federal Reserve keeps interest rates very low. As a result of the immense inflow, high-yield rates have gone below 8%, an unusually low spread for the risk.   To compensate for the interest rate risk, managers are moving to short-term paper.

Reflecting these market conditions, the GSO fund’s strategy is short-term. It will invest in below-investment-grade debt of varying maturities but aim to build a portfolio with an average duration of three years or less.

Another threat is that the European crisis may cause investors to move away from risky assets such as junk bonds.

To reduce the risk of default, the new fund is to invest in the debt of strong companies with positive cash flow and proven management. Companies owned by private equity are seen as desirable issuers—because private equity managers signal their approval of the business by investing and have an incentive to provide additional capital if necessary.

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