Junk Funds Generate Net Inflows Again

The highest corporate “junk” bond yields since the mid-1990s might finally be attracting buyers. Or at least, they’re discouraging potential sellers.

Investors last week added a net $106 million to junk bond mutual funds, the first weekly net inflow since mid-February, said sources citing fund-tracker AMG Data Services.

Money has been pouring out of junk bond funds, and bond funds in general, for most of this year, as investors have reacted to falling bond fund share values caused by the surge in market interest rates.

Last week’s net inflow to junk funds doesn’t necessarily mean the trend has shifted for good, of course. But it came at a curious time, given the rising concern that the Federal Reserve is about to get more aggressive in boosting short-term interest rates to cool the economy.

The inflow is “certainly an encouraging sign,” said Kingman Penniman, president of KDP Investment Advisors Inc., a Montpelier, Vt.-based junk bond research firm. “There’s value in the marketplace, and there is a sense of relief coming. It’s just a question of when.”

The average annualized yield on KDP’s index of 100 junk bonds, which are securities issued by companies considered less than investment grade in quality, stood at 11.12% as of Friday. That’s up from 9.3% a year ago, and near the highest since 1995.

Investors have two concerns about junk bonds: that general market interest rates will continue to rise, pushing junk yields higher as well; and that the Fed will succeed in slowing the economy, raising the risk that more heavily indebted junk issuers will have trouble making their debt payments.

Companies have paid for this sour sentiment. Last week, four firms completed junk bond sales totaling $750 million. But three--Grapes Telecommunications, Jostens Inc. and PF.Net--had to offer yields of 13.5% or higher, and warrants for 3% to 6% equity stakes, to complete their sales.

Jostens and PF.Net, moreover, had to slash their sales because of slack demand.

“You’re seeing a high-yield market that has low supply because of high costs, and those that do come are coming in at a pretty high concession to get priced,” Penniman said.

Companies have sold just $18.8 billion in junk debt so far in 2000, down 54% from a year ago, Thomson Financial Securities Data said. And no sale of any kind is definitively scheduled for this week.

Still, that reduced supply could be good for existing bonds if, and when, investors’ confidence about junk bonds returns for good.