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Portfolio > Mutual Funds > Bond Funds

High-Yield Bond Funds -- Year-End 2004 Review

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Jan. 3, 2005 — Investors in high-yield corporate bond funds were able to enjoy their New Year’s Eve celebrations, but they may be in for a mild hangover at the end of 2005.

Junk bond mutual funds returned 3.8% on average in the fourth quarter of 2004, and 9.2% for the full year, preliminary data from Standard & Poor’s showed. But gains in 2005 are likely to be slimmer, money managers and others said.

“We’re not looking for anywhere near as good a year in 2005 as we enjoyed in 2004,” said Mark Vaselkiv, who runs the T Rowe Price High Yield Fund (PRHYX). Vaselkiv said he sees full-year returns in the “low single digit” range, “because we think the market’s just got to give back some of the gains it’s enjoyed over the last two years.”

Other fund managers forecast full-year returns, a product of bond prices and interest paid, of 4%-6%.

“I’ll take the coupon and back it off a little bit,” said Peter Ehret, who helps oversee the AIM High Yield Fund/A (AMHYX).

David Wyss, chief economist for Standard & Poor’s, had a more pessimistic outlook for the sector, however.

“My suspicion is that they’ll wind up in negative territory, but probably not by much,” he said of returns through the first half of the year. As for the full year, he expects them to be “close to zero.”

Observers warned that the spread, or difference, between the average yield on junk bonds and 10-year Treasurys has narrowed dramatically recently, possibly signalling that the high-yield market may be in for a correction. If spreads widen, then bond prices will drop.

Decreasing yields represent another potential problem for the sector. Junk bonds usually offer plump yields to make themselves attractive to investors. But yields have shrunk to around 7%, the lowest they’ve been in years, noted Dana Erikson, the manager of the Evergreen High Yield Bond/A (EKHAX), who heads Evergreen Funds’ high yield group.

On the plus side, in the year that just ended, junk bonds were helped by the improving U.S. economy, which enabled companies to strengthen their balance sheets, thus boosting investors’ confidence that junk bond obligations would be met. The bonds also benefitted from low interest rates, which made competing fixed-income investments look less attractive to yield-hungry investors, and from low default rates.

Looking ahead, fund managers said they expect the sector to continue to be underpinned by low default rates, as well as economic growth, which they see continuing, albeit at a slower pace, in 2005.

High-Yield Corporate Bond Funds

Best Performers

Fourth Quarter 2004 Returns Through 12/31/04 (%)

Worst Performers

Fourth Quarter 2004 Returns Through 12/31/04 (%)

SunAmerica High Yield Bond Fund/C (SHNCX)


MainStay Floating Rate/C (MXFCX)


Loomis Sayles Institutional High Income (LSHIX)


Eaton Vance Floating-Rate/C (ECBLX)


Credit Suisse Instl High Yield (RBSFX)


Franklin Inv Sec:Floating Rate Dly Access/B (FBFRX)


Fidelity Advisor High Income Advantage/A (FAHDX)


Fidelity Advisor Floating Rate High Inc/C (FFRCX)


J Hancock High Yield Fund/A (JHHBX)


Putnam Floating Rate Income/A (PFLRX)


Best Performers

2004 Returns Through 12/31/04 (%)

Worst Performers

2004 Returns Through 12/31/04 (%)

Credit Suisse Instl High Yield (RBSFX)


Eaton Vance Floating-Rate/C (ECBLX)


Delaware Pooled Tr:High Yield Bond (DPHYX)


Franklin Inv Sec:Floating Rate Dly Access/B (FBFRX)


SunAmerica High Yield Bond Fund/Z (NHIIX)


Fidelity Advisor Floating Rate High Inc/B (FFRBX)


Regions Morgan Keegan Sel High Income/I (RHIIX)


Fidelity Floating Rate High Income (FFRHX)


Delaware Group:Delchester Fund/I (DETIX)


Strong Short Term Hi Yld Bond Fund/Adv (SSTHX)


Source: Standard & Poor’s. Preliminary data as of 12/31/04.

Contact Bob Keane with questions or comments at:[email protected].


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