CREDIT MARKETSOCTOBER 12, 2011, 6:29 P.M. ET.
Some Funds ‘Junk’ Their Strategy .
By PRABHA NATARAJAN
After riding a two-year rally in U.S. “junk” bonds, some high-yield bond-fund managers are looking elsewhere for returns.
Some fund managers said they are worried that U.S. companies selling below-investment-grade, or junk, bonds aren’t compensating investors enough for the risk, especially as the economy slows. So, they are putting more money into other assets they consider better value and less risky, such as corporate debt in Europe or emerging markets, commercial mortgage-backed securities and convertible bonds.
“While there’s tremendous amount of uncertainty, good opportunities are starting to present themselves,” Jim Keenan, head of leveraged finance portfolios and investments at BlackRock Inc. BlackRock is buying some debt of companies in Europe and Latin and Central America, he said.
As investors piled into junk bonds in recent years, more and more companies have been able to sell debt at low rates. Many have persuaded investors to drop tough restrictions dictating how much debt the companies can amass and enabling companies freer rein to make acquisitions or restructure. That, as well as a slowing economy, has made some investors wary.
Junk-bond returns have lost 6.8% since June 30, according to the Barclays Capital U.S. Corporate High Yield index, and high-yield fund returns are now minus-2.1% for the year, as worries rise about the health of the U.S. economy.
Investors have demanded higher yields to compensate for the increase in risk for debt of junk-rated companies. Junk-bond yields are averaging 9.61%, according to Barclays Capital, compared with 7.47% a year ago. The average yield on investment-grade bonds is 4.03%, according to Barclays.
To be sure, those rising yields eventually could tempt some investors to buy.