Junk Bonds Endure $633-Million Outflow

In a sign of mounting troubles in the junk bond market, investors yanked $633 million from junk bond mutual funds in the week ending Wednesday, the most in three months, according to AMG Data Services. The outflow has exacerbated the price declines of many junk bonds and made it tough going for the many issuers trying to sell bonds this week.

Fresh weakness in the telecommunications sector, which accounts for many outstanding junk bonds, hit the sector hard, investors said.

“This was a very, very tough week for telecommunications bonds,” said Walter Morales, high-yield portfolio manager at Commonwealth Advisors in Baton Rouge, La.

Many telecom bonds tumbled in the wake of new profit warnings during the last two weeks from such firms as Nortel Networks and JDS Uniphase. The reports left investors more squeamish about the companies’ ability to pay their debts.

But the junk market’s woes spread beyond telecom.

American Greetings Corp. said Friday that it sold about $400 million of junk and convertible bonds to pay down debt, but not before the greeting-card giant reworked its sale and agreed to pay out much higher yields than expected.

The sale, which market sources said took place late Thursday, came two days after Cleveland-based American Greetings posted an $80-million fiscal first-quarter loss. The company’s seven-year notes yielded 12.5%. The firm had hoped to pay about 11%.

American Greetings stock (ticker symbol: AM) sank $1.32 to $10.36 on the New York Stock Exchange on Friday.

Some analysts hold out hope that another interest-rate cut by the Federal Reserve next week will help halt the junk market’s latest sell-off.