More Investors Flee Junk Bond Funds

Investors pulled $661 million from junk bond mutual funds this week, on top of $685 million in the previous two weeks, as they flocked to safer securities in the wake of the Sept. 11 terrorist attacks.

The outflow for the week ended Wednesday came as corporate junk bonds prepared to close out their worst month in at least 15 years. Junk bond prices have plummeted as investors have dumped the securities, fearing a severe economic recession could cause a new surge in bond defaults by issuers.

“I don’t think we’ve ever seen a period, going back to the early 1980s, . . . where the psychology of so many players has been so disrupted,” said Kingman Penniman, president of KDP Investment Advisors Inc., a high-yield research firm.

Junk bond mutual fund cash flows, reported late Thursday by Arcata, Calif.-based AMG, are considered a key barometer of sentiment for the bonds. Junk funds hold a total of about $85 billion.

The average total return on junk bond funds was a negative 6.3% in September, and the average fund now is down 3.3% year to date, according to preliminary data from Lipper Inc. That means the fall in the bonds’ prices this year has more than wiped out the high yields they pay.

As prices fall yields rise further. The yield on KDP’s index of 100 junk issues reached 12.1% by the end of this week, up from 10.9% in mid-August.