By Bryan Keogh
Aug. 31 (Bloomberg) -- Investors added $83 million to high- yield bond funds, the first infusion in 12 weeks, seeking to capitalize on gains in high-risk debt, JPMorgan Chase & Co. said, citing AMG Data Services.
The increase signals the panic that caused money markets to freeze up and delayed 50 bond sales may be abating. High-yield mutual funds had reported outflows of $3.8 billion in the past 11 weeks, JPMorgan said yesterday, citing data from Arcata, California-based AMG.
High-yield bonds returned 1 percent in August, an annualized rate of about 13 percent, after losing 3.1 percent in July, the worst performance in five years. Investor appetite for speculative-grade debt had plunged as losses from subprime mortgage securities spread throughout credit markets, prompting investors to retreat from all but the safest of debt.
``It's a pleasant surprise,'' said Andrew Feltus, who helps oversee $9 billion as a senior vice president and fund manager with Pioneer Investment Management in Boston. ``It may not be a time to be all in, but it's definitely time to be adding.''
Investment-grade bond funds reported a fourth consecutive week of outflows for the period ended Aug. 29, with investors pulling out $75 million, compared with $940 million last week, according to JPMorgan in New York. Investment-grade bonds have returned an annualized 14.5 percent this month, compared with 3.41 percent in July, Merrill Lynch & Co. index data show.
High-yield, or junk-rated, companies have ratings of Ba1 and below at Moody's Investors Service and BB+ and lower at Standard & Poor's.
Private Equity Firms
The return of money to junk bonds may be good news for private equity firms such as Kohlberg Kravis Roberts & Co. and Blackstone Group LP, both based in New York, which are among leveraged buyout firms planning to sell more than $320 billion in bonds and loans to finance purchases this year.
The extra yield above U.S. Treasuries rose 5 basis points yesterday to 448 basis points, according to Merrill Lynch. The gap narrowed to a record low of 241 basis points on June 5. A basis point is 0.01 percentage point.
President George W. Bush and Federal Reserve Chairman Benjamin S. Bernanke both pledged today to help prevent the credit crisis from expanding. Bush promised to help people with risky subprime mortgages keep their homes and tighten safeguards against predatory lending, while rejecting a bailout for ``speculators.'' Bernanke said the Fed will ``act as needed'' to stop the credit market rout from undoing the six-year economic expansion.
High-Yield Buyers
Investors such as James Swanson, chief investment strategist at MFS Investment Management, Matthew Eagan, portfolio manager at Loomis Sayles & Co., and Nuveen Investment Management's Manny Labrinos this month said they are buying some high-yield debt. Eric Takaha, director of corporate credit at San Mateo, California-based Franklin Resources Inc., is looking for bonds of companies that generate cash and pay down debt. Franklin Resources manages $160 billion of fixed-income assets.
``We are finding value, but we're not at the point in time where this is the cheapest place to be,'' Takaha said.
The top two performing high-yield funds year-to-date are the AFBA 5Star High Yield Fund and the Julius Baer Global High Income Fund, according to data compiled by Bloomberg. The $19 million AFBA fund has returned 2.31 percent and the $197 million Julius Baer fund is up 2.2 percent, Bloomberg data show.
High-yield fund managers said they base their confidence on rising corporate profits and low default rates.
Companies in the S&P 500 reported a 9.8 percent increase in second-quarter earnings, data compiled by Bloomberg show. About 66 percent of the 480 companies reported net income that beat analysts' expectations.
The global default rate on high-yield corporate bonds is at 1.5 percent, near a 12-year low of 1.4 percent in June, according to Kenneth Emery, director of corporate default research at New York-based Moody's, the ratings unit of Moody's Corp.
