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Monday, November 30, 2009

Investors are Enamored of Junk

News summary by MFWire's editors

Investors have swarmed junk bonds this year, injecting more than $20 billion into high-yield bond funds. Spurred by huge returns, as high as 53 percent, and floundering yields on cash, investors continue to pour money even as the party may be starting to wrap up, notes the Wall Street Journal's Jason Zweig in his Intelligent Investor column over the weekend.

"The inflow of funds has been phenomenal," Daniel Fuss, manager of the $18.5 billion Loomis Sayles Bond Fund , was quoted as saying. "I have not seen a rally like this, ever, in the high-yield market."

However, dumping money into junk may no longer be a smart move. Christopher Garman of Garman Research stated that although bond funds should see positive returns in the coming months, high yield is "no longer the capital-appreciation vehicle it was" last year, and more borrowers will end up defaulting, should the market fail to rebound properly.

"Who needs junk bonds to have a diversified portfolio?" asked William Reichenstein, a professor of finance at Baylor University. "I would say nobody. They're a hybrid asset, neither fish nor fowl. They muddy your asset allocation without adding a lot of diversification." 

Edited by: Daniel Tovrov

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