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Junk-Bond Funds Settle Down After a Rough Week

A rough stretch for high yield is a reminder that the sector can require a strong stomach.

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High-yield funds rebounded Tuesday and Wednesday after suffering losses on the three previous trading days following the announcement last Thursday that Third Avenue Management had shuttered Third Avenue Focused Credit. While that fund is atypical in that it employed a high-risk strategy focused on distressed debt, its closure exacerbated already-heightened concerns in the high-yield sector after last week’s sharp drop in oil prices and the anticipation of the Fed’s rate decision. Losses in the high-yield bond Morningstar Category, however, have not been severe. The average fund in the category fell 2.3% from Dec. 10 through Dec. 14. That said, it has been a rough year for the junk market, with the most pain coming from energy and commodity-related sectors, which have been hit hard by the slowdown in China. The average loss for the category was 4.2% for the year to date through Dec. 16. Some of the hardest-hit funds, including  Franklin High Income (FHAIX) and  American Funds American High-Income (AHITX), have suffered losses nearly double that.

After experiencing $25 billion in estimated net outflows in the second half of 2014, flows to the high-yield sector have been volatile through 2015. The high-yield bond Morningstar Category had seen an estimated $5.1 billion in net outflows for the year to date through November 2015, a trend that continued into December. That said, conversations with market participants suggest that these flows have thus far been manageable.

Sarah Bush does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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