Magazine article Global Finance

The Americas: High-Yield Funds Attracting Investors

Magazine article Global Finance

The Americas: High-Yield Funds Attracting Investors

Article excerpt

Mutual funds that invest in high-yield bonds returned 5.4% on average in the first quarter of 2003, continuing a winning streak that began late last year, according to New York-based Standard & Poor's.

"Junk bonds have been helped by low interest rates, which make their yields look more attractive compared to other fixed-income investments," says Joel Friedman, director at S&P.

"Helping the cause is that investors gained confidence in high-yield bonds as default rates for the securities stabilized or declined in recent months," he says.

The 12-month rolling average default rate for US high-yield issuers declined to 6.9% in March 2003 from 10.2% in April 2002, S&P data show.

While the war in Iraq and the political tensions that preceded it hurt the equity market in the first quarter, the effect on the high-yield bond market was virtually unnoticeable, Friedman says. "This doesn't mean that high-yield bond funds are immune to volatility," he says. "Should interest rates begin to creep back up, or domestic stocks begin to rebound, the market could see some price pressure on a lot of the high-flying funds," Friedman says.

Investors poured $8.6 billion into high-yield bond funds in the first quarter of this year, including $3.9 billion in March alone, according to Arcata, California-based AMG Data Services.

All 354 high-yield bond funds tracked by S&P ended the first three months of 2003 with gains.

"In aggregate, the credit picture has become unexpectedly good," says Kenneth Hackel, chief US fixed-income strategist at Merrill Lynch in New York. …

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