‘Junk’ Bond Sales Decline as Credit Tightening Has Investors Fretting

Higher interest rates are pricing many potential “junk” bond issuers out of the market.

But so far, that reduced supply of new bonds isn’t helping owners of junk bond mutual funds much.

Junk bond issuance in May fell to a five-year low. Just seven U.S. companies, led by casino operator MGM Grand Inc., sold a total of $1.8 billion of junk bonds in May, bringing the total for the year to $20 billion--down 62% from the same period last year.

“It’s a real struggle for most lower-rated companies to raise money right now,” said Jerry Paul, who helps manage about $1.7 billion of junk bonds at Invesco Funds in Denver.

The Federal Reserve’s credit-tightening moves have many investors fretting about the potential harm to debt-burdened companies from an economic slowdown.

That is causing the relative few junk bond buyers in the market to demand ever-higher yields. The yield on the KDP Investment Advisors index of 100 junk bonds now is 11.54%, up from 9.8% a year ago.

As market yields rise, the value of older junk bonds--such as those in junk bond-fund portfolios--declines, causing fund share prices to depreciate.

Faced with falling share prices, many junk-fund investors have been cashing out this year. That makes the situation worse for the investors who stay put.

AMG Data Services estimates that investors have pulled more than $5 billion from junk bond funds this year.

Don’t expect relief for the junk market, experts say, until investors are sure the Fed is nearly done raising rates--and that we aren’t heading for recession.

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Junk Yields Soar

Investors are demanding ever-higher yields on corporate “junk” bonds--pricing many potential issuers out of the market.

Monthly closes and latest

for the yield of the KDP

index of 100

junk bonds:

Wednesday:

11.54%Source: Bloomberg News