This week Dan Heckman, US Bank's senior fixed-income strategist, warned cable audiences that market liquidity is shrinking across asset classes. He supported his position with a similar quotes from Mohamed El-Erian, chief economic advisor at Allianz, and cautioned investors to re-exam where and how their bonds are packaged. Also this week the two corporate high-yield bond bellwether funds hit lows, and that was before the Fed raised the short term interest rate by just one quarter of one percent.

Industry pros watched the iShares iBoxx $ High Yield (HYG) ETF, which tracks junk bonds, drop further on Monday and was down 13.7 percent from its 2015 high before recovering to -12.3 percent by Wednesday. Over the same period the SPDR Barclays High Yield (JNK) had fallen 15.9 percent -- to prices not seen since July 2009 -- before rallying back to -14.3 percent, as of Dec. 16, according to Jeff Tjornehoj, Head of Americas Research for Thomson Reuters Lipper.

How much of the decline in corporate bond funds is really due to credit quality? Admittedly, declining oil prices continued to taint prospects for oil company debt. But some seasoned investment advisors saw these companies and the bond market splashed by the same tar brush. “When people started selling oil bonds then other bonds were affected,” says Dave Peckenpaugh, SVP and chief investment officer for Whitnell & Co., a registered investment advisor in Oakbrook, Ill. “I don't think there is an issue of corporate credit quality -- outside of the oil patch.”

For now, Whitnell prefers municipal bonds. “We hold the bond portion of the portfolio for more stability, income flow and to diversify from risks,” says Peckenpaugh. But, the way the market has been trading bonds has made them perform more like stocks, he notes. “We had money in high-yield munis last year, but decided not to take risks.”  He's been holding back on corporate bonds in general.“The potential ROI is not very strong, so we don't want to take significant risk in that asset.”   

Don E. Olmstead, CFP, managing director of Novare Capital Management, a Charlotte, N.C.-based RIA with about $800 million in AUM, has not been allocating to high-yield bonds in the past three to four years. Although, he says, “we could look at high-yield again in 2016.” With the issuers' rates rising to compensate for the rise in risk, “they are tempting,” he admits. “But our clients are conservative.”

As racy as Novare currently goes are some A-rated Halliburton oil bonds “with nice spreads,” which tripled their value, and Fidelity's Floating Rate High Income (FFRHX) actively managed mutual fund, a position which the firm has been reducing of late in select accounts. “For clients that have losses in the fund and need to harvest those losses we are selling,” he says. “Other client positions, we are continuing to hold in the fund. We like the floating-rate aspect and the credit work the Fidelity team does on the leveraged loans. The risk in the sector has risen, but we believe Fidelity does a great job managing this risk.”

When Peckenpaugh does go back into high-yield corporate bonds, it will be through mutual funds, he says, not ETFs. “I think it's very important to have a strong credit rating analytical expertise. We don't believe an independent RIA like ours can do that today. So we work with mutual funds or outside managers for research.” Also, Peckenpaugh feels that ETFs in the high-yield market create an “interesting mismatch.” Despite the ETF's liquidity, “the underlying holdings may or may not have that availability. There's potential liquidity risk in high-yield ETFs.”