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Junk Bond Fund Assets Begin to Climb

Assets of high-yield or junk bond mutual funds have risen roughly $1.5 billion since the beginning of the year. In the week ending Jan. 17 alone, assets rose $658.7 million and in the subsequent week, ending Jan. 17, they rose $834 million, according to AMG Data Services of Arcata, Calif., a mutual fund asset-tracking firm. Those increases are substantial considering the fall in assets in junk bond funds recently. Assets in the funds decreased by $10.94 billion from the beginning of the third quarter of 1999 to the end of the third quarter of 2000, according to AMG. That represents the largest drop in junk bond assets for any five-quarter period on record, according to AMG.

One of the main reasons for the turn around is the recent decrease in interest rates, according to analysts. The lower rates can help the financial position of companies, especially those that would issue more poorly-rated bonds, according to Avi Nachmany, director of research at Strategic Insight, a consulting firm in New York.

"The big thing is that capital markets have loosened up a bit," said Scott Cooley, an analyst with Morningstar of Chicago. "With the Fed cutting interest rates, it's more likely that those bonds won't default. The Fed even cited the conditions in some of the capital markets and a lot of people speculated that that was because companies with weaker credit ratings were having a hard time raising the capital they needed. The Fed may be getting their desired effect."

The risk of companies defaulting on their bonds may be less of a concern in general, especially in a volatile market, according to Jim Folwell, an analyst with Cerulli Associates of Boston.

"I suspect [the junk bond fund asset increase] is reactive," said Folwell. "We've seen this before where turbulence in the equity markets has led to an increase in junk bond funds. These days, even junk bonds don't carry a lot of default risk so it might be a pretty good investment, especially when you consider returns of some other funds. It's better getting an eight or nine percent return than negative 20 [percent]. People are probably a little gun shy after last year."

Some analysts suggest investors are anticipating a repeat of some past junk bond returns. In 1990, junk bond funds had a return of negative 9.5 percent, but then rebounded in 1991 with a positive return of 37 percent, according to Morningstar. The junk bond fund yield in 2000 was negative 9.1 percent.

"I think a lot of investors are expecting a pop like the high yield market had in 91 after a very difficult time in 1990," said Scott Berry, an analyst with Morningstar. "They're looking for a similar rebound." The year-to-date return for the category is 5.62 percent, according to Morningstar.

It is difficult to predict investor tendencies, but it would stand to reason that flows into junk bond funds will continue as long as interest rates stay down, according to Nachmany.

"I think [asset increases will continue] as long as the assumption that the financial fortunes of these companies will be improving," said Nachmany. "There are a lot of people who feel this area is one of great opportunity, especially compared to some risky equity segments."