Junk-Bond Funds Absorb Big Hits --- High-Yield Sector Declines Along With Stocks, Creating Possible Buying Scenarios
The past two months have been punishing ones for investors in "high yield," or junk-bond, funds.</br></br>After a few years in which these funds outstripped most other types of bond funds, they have recently fallen hard, in step with the stock market. Some other bond funds, by contrast, have eked out recent gains that partly offset investors' stock-market pain.</br></br>The recent performance of junk bonds shouldn't be any surprise to investors familiar with the odd hybrid nature of below-investment-grade bonds. "Sometimes these securities trade with the general bond market and sometimes they trade with the stock market," says Earl McEvoy, manager of Vanguard Fixed-Income Securities High-Yield Fund. Lately, it's been much closer to the stock market.</br></br>But "too often," Mr. McEvoy says, investors assume a high-yield fund is simply that -- "just another bond fund with a higher yield." In a period like the past several weeks -- when stock prices tumbled but government-bond prices rose -- he says investors may assume mistakenly that their junk-bond funds are comfortably holding their ground.</br></br>That certainly hasn't been the case. Since the stock-market peak on July 17, Lipper Analytical Services Inc.'s high-yield fund index has posted a negative 9.0% return. That's not as bad as the performance of most stock funds, such as the 15.7% decline for the Lipper Growth Fund Index. But it is sharply worse than the positive 3.1% return on a Lipper index of government-bond funds and a positive 2.0% return on its index of funds holding high-quality (A-rated) corporate bonds.