The recent junk bond rally has drawn record billions of dollars to high-yield bond funds. What junk’s newfound fans might not realize is that their own frenzy has fueled much of these recent gains and that when interest in high-yield funds cools, the junk market may live up to its name.
“It’s been more of a technical rally than a fundamental rally, with money basically flooding the market and lifting all the boats,” says Sandy Rufenacht, manager of the $1 billion Janus High Yield Fund (JAHYX) since 1996. “It’s just not justified by the type of economy we’re in.” Junk, or high-yield, bonds, are debt issued by companies with a credit rating of double-B or lower because of short or spotty credit records. Since they are offered by companies with a lot of debt, less-than-perfect credit or both, they tend to pay far higher interest than investment-grade bonds, assuming the issuer doesn’t default.