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Junk bond sales hit a record as investors rush for yield

March 29, 2010 | 12:07 pm

Investors’ appetite for U.S. Treasury securities may have waned, but their hunger for high-yield corporate junk bonds remains robust.

Yield is king: If you have it, investors want it -- and nobody’s terribly worried about risk at the moment.

That means that the first quarter, which ends Wednesday, will be another strong one for many junk bond mutual funds popular with individuals.

Even as Treasury bond yields jumped last week amid disappointing investor demand at the government’s auctions of $118 billion in new debt, buyers continued to snap up junk issues.

Issuance of new junk bonds worldwide is on track to top $38 billion this month, surpassing the previous monthly record of $36 billion in November 2006, according to Bloomberg News. . . .

The junk market had sold off from mid-January to early February as fears over European government debt troubles (Greece, etc.) caused many investors to pull away from higher-risk bonds in general.

The average yield on an index of 100 junk issues tracked by KDP Investment Advisors jumped to a five-month high of 8.79% by Feb. 11 from 7.77% on Jan. 12. Bond prices drop as market yields rise.

But buyers have flocked back to the junk market this month as the U.S. economy has stayed on the recovery track, boosting optimism about corporate financial health. The KDP index yield was at 7.82% on Friday after declining for four straight weeks.

Falling yields and rising bond prices have pushed share values of many junk bond mutual funds to new 52-week highs in recent days.

Shares of the Pimco High Yield fund closed at $9.06 on Friday, the highest since mid-2008. The fund’s total return (share price change plus interest earnings) is 5% year to date. The Vanguard High-Yield Corporate fund, which also is at its highest since mid-2008, is up 2.9% this year.

The average junk fund is up 4% year to date, the best performance of any category of bond funds, according to Morningstar Inc.

Still, the stock market is on track to beat junk funds’ returns this quarter: The Standard & Poor’s 500 index’s total return is 5.1% so far.

-- Tom Petruno

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