‘Junk’ Bond Mutual Funds See No Signs of Panic Sales

Managers of mutual funds investing in high-yield “junk” bonds reported some shareholder skittishness and scattered redemptions Wednesday but no stampede away from the funds in the wake of the Ivan F. Boesky insider trading scandal and the subsequent focus on the activities of Drexel Burnham Lambert, the firm known best for issuing and trading that breed of bonds.

The reaction of mutual fund investors is considered particularly crucial because mutual funds hold an estimated 35% to 40% of the $100 billion in junk bonds outstanding. Many on Wall Street fear that fund holders may accelerate their redemptions as they see the net asset values of their holdings fall.

“It is what everyone is worrying about,” said Jonathan Kolatch, director of corporate bond research at Goldman, Sachs & Co. in New York, who noted that a rash of shareholder redemptions could further depress the prices of junk bonds.

Many investors sought double-digit interest rates from junk-bond funds when such high rates disappeared from their banks.

“But so far,” Kolatch added, “there has been no panic selling.”

Junk bonds, which are often issued to finance corporate takeovers and restructurings, have been hurt severely by news that the Securities and Exchange Commission has issued a formal order of investigation against Drexel Burnham Lambert.

Many issues have fallen $30 or $40 per $1,000 bond so far this week, and the stock prices of companies that are big investors in such bonds have dropped sharply.

“There is a lot of concern that Drexel’s ability to service the junk market will be constrained,” said Elizabeth Mulhare, a vice president of Standard & Poor’s Corp., a New York bond-rating agency.

Drexel Burnham accounts for more than 50% of junk-bond underwriting and trading, and it is the only firm that deals in some lesser-known issues. “Though other players would step into the vacuum, there might be liquidity problems for a while,” Mulhare added.

Drexel, in a statement, said Wednesday that it is “confident in its ability to resolve the open questions and continue to serve the interests of its clients.”

Still, there are signs of a liquidity crunch as some buyers move to the sidelines. “Unfortunately, we have had to sell some bonds to meet redemptions,” said George J. Collins, chairman of Baltimore-based T. Rowe Price High-Yield bond fund, which has about $830 million in assets. He declined to say how much investors have pulled out of the fund.

“A lot of funds are lightening up in anticipation of further redemptions,” Collins added. “The market is very thin,” he said.

At discount broker Charles Schwab & Co., redemptions of junk-bond funds that it sells for others on Wednesday exceeded purchases by three to one. “Some of the redemptions have been very sizable,” said Hugo W. Quackenbush, Schwab’s senior vice president for marketing. “One of our customers moved $1.5 million out of one junk fund.”

In general, he said, the people pulling money out of such funds have been investing the proceeds in money-market funds or funds that hold only government bonds.

But movement away from junk bonds hasn’t been universal. Fidelity Investments and Vanguard Group said they haven’t experienced unusually high shareholder redemptions from their high-yield funds.

And at American Investors Income Fund, which has just $25 million its its junk fund, “of a half-dozen nervous callers, only one actually redeemed his shares,” a fund official said.

Many Wall Street professionals likened current market jitters to the scare that followed the bankruptcy filing earlier this year by big junk-bond issuer LTV Corp.

“You have got to remember that nothing has happened, fundamentally, to these bond issuers,” Kolatch of Goldman, Sachs said, adding: “I don’t see the market falling off the cliff.”

The head of one large insurance company that invests heavily in junk bonds also professed confidence. “The market is much bigger and much broader than Drexel,” he said. “If Drexel went out of business today, every investment banker in the U.S. would be fighting for its business,” he added.