With interest rates at historic lows and money-market funds barely paying, high-yield and multi-sector bond funds have enjoyed huge runs over the past 18 months as yield-hungry investors snap up higher-yielding bonds. That’s left many to wonder whether the sector offers additional upside and if investors are being adequately compensated for risk. This multi-sector bond fund is one of my favorites and should continue to perform regardless of what the future holds.

High-yield bonds were the best-performing fixed-income category in 2009; funds structured around these instruments generated an average return of better than 46 percent.

This marked a sharp turnaround from 2008, when the market regarded any company relegated to the high-yield category as essentially bankrupt; high-yield bond losses for the year were exceeded only by bank loans.

The question now is whether high-yield funds have more room to run.

In recent testimony before Congress, Federal Reserve Chairman Ben Bernanke repeated his oft-stated pledge that interest rates would remain low for an extended period. That’s good news for high-yield bonds.

Spreads over Treasuries, which climbed as high as 21.82 percent points during the worst of the financial crisis, have tightened to around 7 points as investors have rediscovered their risk tolerance. That many investors are forced to reach for yield certainly hasn’t hurt matters.

Even this recovery puts spreads above the long-term average of the 4.5 percentage points; prices for high-yield bonds still have room to rise. Two years after the official conclusions of the past two recessions, high-yield bonds gained better than 80 percent. This, too, suggests there’s room to run.

Interest rates will inevitably rise, and high-yield bonds tend to perform well during tightening cycles. Although Treasury yields increased from 2.3 percent in June 2003 to 3.9 percent in June 2004, high-yield bonds gained 14.2 percent.

Finally, the overall economic environment continues to improve, and access to financing for speculative-grade credits is increasing along with profitability.

Default rates on these riskier credits are expected to slow from a peak of 12.9 percent in November 2009 to just 3.3 percent over the course of this year. This less-ominous forecast suggests that spreads will continue to tighten.

Despite that outlook, most high-yielding funds simply aren’t positioned to benefit from the full confluence of circumstances.

Some will maintain their yields by moving into riskier assets, while others will generate solid capital gains but offer declining payouts. Right now, I only know of one fund that can both maintain its yield and book capital gains.

Despite last year’s huge run, 2010 should be another solid year for Carl Kaufman and Osterweis Strategic Income (OSTIX). The fund’s current portfolio consists primarily of lower-rated bonds with shorter maturities. I expect Osterweis Strategic Income to benefit from tightening credit spreads over the course of the year.

Kaufman has also upped his stake in convertibles–the prices of which behave more like stocks than bonds–to 14 percent, positioning the fund to benefit from further improvement in equities.

Kaufman has also shifted assets to foreign corporate debt. His largest holding is Millicom International Cellular 10 Percent Note of 2013–a typical Kaufman investment.

This bond, like many of Kaufman’s holdings, is unrated. Millicom International Cellular (NSDQ: MICC) is a leading provider of cellular phone service in emerging markets, one of the few areas of the world where cellular penetration rates have room to grow. The firm reported robust growth in Africa and South America and is now the leading provider by market share in Honduras, Paraguay, El Salvador and Guatemala. The company’s cash flow provides ample coverage for debt-service payments.

Despite solid positions in markets with growth potential, Millicom has failed to garner much attention from investors or any love from the credit rating agencies. Nevertheless, the credit doesn’t appear to involve excessive risk.

This example demonstrates Kaufman’s strengths. By closely monitoring the broader economic picture and focusing on securities that offer good value, Kaufman has constructed a portfolio that offers an impressive yield without excessive volatility. A focus on issues from companies that generate ample cash flow to cover their debt obligations has limited blowups.

Although investors should avoid most high-yielding funds at these levels, Osterweis Strategic Income still offers plenty of potential.