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WSJ: Big Investors Jump for Junk Bonds Sold by Retail Investors

By Dan Weil   |  

Individual investors have been fleeing high-yield (junk) bonds in recent weeks amid concern about geopolitical turmoil, potential interest rate hikes by the Federal Reserve and many experts' proclamations that the bonds are highly overvalued.

But institutional investors have seen opportunity in the price decline that followed, buying junk bonds on the cheap, The Wall Street Journal reports. These investors say the worries are overdone.

Retail investors pulled $13 billion out of junk-bond mutual funds and exchange-traded funds in the four weeks ended Aug. 6, according to the paper.

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"There really is no good reason why high yield sold off in the first place," David Mazza, head of research in the ETF unit at State Street Global Advisors, told The Journal. "Nothing changed in the outlook for defaults."

Standard & Poor's projects that the junk-bond default rate will climb from 1.5 percent in June to 2.7 percent next June, the paper reports. But that's still far below the 4.4 percent average of the past 30 years.

The institutional buying has helped the Barclays U.S. Corporate High Yield bond index return 1 percent so far this month. The index has returned 5.1 percent so far this year.

"The now-calmer market allows investors to return to the fundamental stories underlying their holdings," Barclays strategists led by Brad Rogoff wrote in an Aug. 15 report obtained by Bloomberg.

"We remain positive on the market’s fundamentals, and a closer look at second-quarter results corroborates our view."

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Individual investors have been fleeinghigh-yield (junk) bonds in recent weeks amid concern about geopoliticalturmoil, potential interest rate hikes by the Federal Reserve and manyexperts' proclamations that the bonds are highly overvalued. But institutional investors have...
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