Oct. 3, 2002 — High-Yield, or junk bonds, which tend to move in the same direction as stocks, followed them lower in the third quarter as concerns about the economy and corporate performance continued to dog both sectors.
The average high-yield bond fund lost 3.5% in the third quarter. Year to date, high-yield bond funds are down 7.4% on average.
Junk bonds have been depressed all year because of the weak economy and stock prices, worries over corporate accounting, and high default rates.
Supplies of high-yield bonds increased this year because a number of large companies whose bonds had been rated investment-grade saw them downgraded to junk status.
Most recently, the threat of war in Iraq was added to the list of junk bond woes.
“That’s a very potent combination of negative forces to hit the market,” says Mark Vaselkiv, who oversees the T Rowe Price High Yield Fund (PRHYX).
Some junk bond fund managers noted that the difference in yield, or the spread, between high-yield bonds and U.S. Treasuries was higher in the last days of the quarter than it had been in more than a decade. This, they say, indicates that the high-yield market may be close to a bottom.
For junk bonds to rebound, portfolio managers say investors must be convinced that the economy is on solid ground and is unlikely to slide back into another recession. A recovery is also dependent on the stock market strengthening, so that companies have access to capital, money managers say.
“I think that to a large extent, our direction will be dictated by the overall tone of the stock market,” Vaselkiv added. “If that could stabilize, we could be in good shape.”