Junk Bond Funds Soar Again in ’92

For a game that supposedly died when the 1980s ended and financier Michael Milken went to jail, the junk bond market has been displaying some remarkable vitality of late.

Indeed, as Milken moved into a Los Angeles halfway house last week after serving 22 months in prison for securities fraud, the market he helped to invent more than a decade earlier had just completed its second straight year of strong gains.

Preliminary figures from Lipper Analytical Services, the mutual fund-tracking firm, show funds investing in these high-yield, lower-quality bonds posting a 17.8% total return for 1992, on top of a 36.4% gain in 1991.

In both of those years, the junk bond funds outperformed not only the average blue chip bond fund, but also the typical fund invested in stocks--even as stock market averages were climbing to new highs.

“The economic climate of 1992, combined with slow, steady growth, proved to be very rewarding for high-yield bonds,” said Thomas Scarlett, a researcher at the advisory service Personal Finance in Alexandria, Va.

But though they are nominally and legally bonds, these securities tend to behave a lot like smaller-company stocks, since their returns are so closely linked to the ups and downs of their issuers’ business affairs, notes Michael Lipper, president of Lipper Analytical.

“People who invest in them should recognize that they are investing in disguised equities,” he says.

But the rally could be blunted by any significant upswing in interest rates, which might slow or reverse the improvement in issuers’ finances and lessen the appeal to investors of junk bond yields, many of which remain at 10% or more.