Junk Gets Dunked

Junk-bond funds are falling out of favor. In one recent week, such funds saw investors pull out $2.4 billion, which is over 2 percent of the assets in these funds.

Some of the problems in the high-yield bond market come from General Motors’ highly-publicized losses. Investors fear that GM (one of the world’s largest issuers of corporate bonds) will see its debt relegated to junk status, creating an increased supply that would, in turn, depress prices.

While junk-bond funds have seen outflows, various niche categories have been receiving new money. New favorites include:

• Treasury Inflation-Protected Securities (TIPS) funds, which guarantee a return in excess of the inflation rate.

• Bank loan participation funds, which will pay higher yields if interest rates rise.

• World income funds, which invest in foreign government and corporate bonds. Such funds have been paying relatively high yields to investors.

• Strategic income funds. Also known as multisector funds, they tend to invest in a mix of Treasuries, junk bonds, and foreign issues. The managers of those funds are not wedded to one sector so they have more flexibility.