Facebook Twitter

INVESTORS DUMPING MONEY BACK INTO JUNK BOND FUNDS

SHARE INVESTORS DUMPING MONEY BACK INTO JUNK BOND FUNDS

With junk bond prices steadying after falling sharply earlier this year, individuals have moved millions of dollars back into mutual funds that own the high-yielding, lower-quality securities, according to data gathered for Money magazine's Small Investor Index.

After the Federal Reserve began raising interest rates in February, prices of junk bonds - those rated below the investment grade of BBB - fell 7.1 percent through April 30. Individuals yanked $2.9 billion from junk bond funds during that period, according to AMG Data Services in Arcata, Calif.Then, when the securities' prices stabilized in May, dipping a mere 0.4 percent, junk bond funds took in a net $910 million. For instance, the Kemper High Yield fund, with $3 billion in assets and an annualized yield of 9.2 percent, was swamped with $210 million in new money in May, after redemptions of $443 million from February through April. The $819 million Massachusetts Financial Services High Yield fund, yielding 8.8 percent, took in $12.6 million in May after losing $140 million in the previous three months.

Many bond market analysts think investors are right to put some money back into junk bonds. "Unless you think a recession is imminent, which I do not, high-yield funds offer much higher return potential than other bond funds," said Joseph Bencivenga, director of corporate bond research at Salomon Bros. "The risk of default will remain minuscule as long as the economy stays strong."

Last week, the Money Small Investor Index, which tracks the typical individual's holdings, rose $71 to $45,651. Stocks gained $73, bonds lost $13. CDs and money funds kicked in $9.