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High Times for High-Yield Bond Funds

Junk bond rally fuels performance, but uncertainty looms.

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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. 

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