April 2, 2003 — The winning streak that began for high-yield bond funds late last year continued into the first three months of 2003 as money flooded into the category.

Funds that invest in so-called junk bonds returned 5.4% on average in the first quarter, preliminary figures from Standard & Poor’s showed. All 354 high-yield bond funds tracked by S&P ended the period in the black.

At the same time, investors poured about $8.6 billion into these products between January and March, including some $3.9 billion last month alone, according to AMG Data Services, which tracks fund cash flows.

“It’s been a fabulous market,” said Margaret Patel, who manages the Pioneer High Yield Fund/A (TAHYX).

Junk bonds have been helped by low interest rates, which makes their yields look more attractive compared to other fixed-income investments, like Treasuries or money-market funds, money managers said.

Investors have also gained confidence in high-yield bonds as default rates for the securities have stabilized or declined in recent months, observers said. The 12-month rolling average default rate for domestic junk bonds stood at 6.9% on March 10, down from 10.2% in April 2002, S&P data showed.

While the war in Iraq and the political tensions that preceded it have hurt stocks lately, their effect on the high-yield market has been virtually nil, portfolio managers said. The market’s performance so far has outweighed concerns over efforts to oust Saddam Hussein, they explained.

However, the fact that junk bonds and stocks, which usually move in sync, have gone separate ways recently may be an ominous sign for the high-yield market, said Richard Cryan, a high-yield bond fund manager with Evergreen Investments.

The divergence leads him to believe either that the high-yield market is due for a breather, or that equities are due to rally, Cryan said.

“I’m not quite sure which to expect,” Cryan said. But given the amount of money investors have been putting into junk-bond funds, “it wouldn’t surprise me to see strong returns” for the offerings in the second quarter, he added.

High-Yield Corporate Bond Funds

Best PerformersFirst Quarter 2003 Returns Through 03/31/03 (%)Worst PerformersFirst Quarter 2003 Returns Through 03/31/03 (%)

  • Fidelity Capital & Income (FAGIX) +10.4Northeast Investors Trust (NTHEX) +0.6
  • Loomis Sayles Inv Tr Institutional High Inc (LSHIX) +10.4Regions Morgan Keegan Select Hi Income/C+1.5
  • Fidelity Advisor High Income/A (FHIAX) +10.1EquiTrust Series:Strategic Yield/A (FBYBX) +1.6
  • MainStay Funds High Yield Corporate Bond/A (MHCAX) +8.3Neuberger Berman High Income Bond/Investor (NBHIX) +1.7
  • Conseco Srs Tr High Yield/Y (CHYYX) +8.0Strong Short Term Hi Yld Bond Fund/Adv (SSTHX) +2.4

Source: Standard & Poor’s. Total returns are in U.S. dollars and include reinvested dividends. Data as of 3/31/03.