Tags: investors | junk | bonds | yield

Investors Flock to Junk Bonds, Creating Danger of Blowout

By    |   Wednesday, 21 May 2014 09:34 AM

Investors are snapping up high-yield (junk) bonds like there's no tomorrow, and that's raising the risk of a market rout, experts say.

Junk-bond open-end mutual funds and exchange-traded funds (ETFs) saw an inflow of $14.7 billion in the first four months of the year, according to Morningstar data provided to Moneynews. That put the funds' total assets at $332.98 billion, up 95 percent from the end of 2009.

Investors are buying junk bonds as they seek more yield in a low-interest-rate environment.  Barclays Capital U.S. High Yield Corporate Bond Index yielded 5.04 percent Wednesday. (The index measures the performance of corporate bonds rated below investment grade.) The spread of junk bond yields over Treasurys has dipped to its lowest level since the heady days of 2007.

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Some experts are worried about the risks created by the junk bond rally. "At some point it's not sustainable," Kathleen Gaffney, portfolio manager of the Eaton Vance Bond Fund, told The Wall Street Journal.

The latest buyers of junk bonds could suffer big losses when interest rates eventually rise, she said.

The Barclays Index has returned 4.3 percent so far this year. But that could disappear in a hurry if rates back up, Rick Tauber, Morningstar's director of corporate credit research, told Moneynews.

George Rusnak, national director of fixed income for Wells Fargo Private Bank, is concerned about junk bond valuations.

"We believe investors should avoid over-allocation to high-yield bonds and diversify income streams across fixed income, equity, real assets and complementary asset holdings," he wrote in a commentary obtained by Barron's.

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Investors are snapping up high-yield (junk) bonds like there's no tomorrow, and that's raising the risk of a market rout, experts say.
investors, junk, bonds, yield
282
2014-34-21
Wednesday, 21 May 2014 09:34 AM
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