Bondholders are rattled by prepayment covenants

Bond markets remain so frothy that corporate-bond buyers aren’t worried they won’t get paid; they are worried about getting paid too soon. High-yield, or “junk,” bonds typically include a stipulation, known as call protection, that forces borrowers to pay steep “make whole” penalties if they buy back the debt early, compensating investors for the interest payments they will miss. But as inflows flooded high-yield funds in 2010, managers became less picky about the protections they required in their scramble to put cash to work, avoiding the make-whole penalties.