High Times for High-Yield Bond Funds
Junk bond rally fuels performance, but uncertainty looms.
In the wake of its worst annual return in a decade, the high-yield bond fund category has rebounded with a vengeance this year. The fast start puts the group on pace for a strong 2001, but before you write your check, consider this: The year is young and a number of forces, including the course of the economy and interest rates, will determine if the high-yield rally gains or loses strength. Furthermore, the group's volatility has tried the nerves of investors in recent years and those ups and downs could continue.
The average high-yield bond fund, which invests in so-called junk bonds issued by companies with lower credit ratings, lost more than 9% last year, its worst performance since 1990. Perhaps sensing junk bonds were poised to snap back the way they did in 1991, when the average fund rose nearly 37%, flooded junk-bond funds with money last month after avoiding them for most of 2000.
Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.