Tuesday, February 28, 2012

The High-Yield Market

We spoke last week about how bond funds have strongly outpaced stock funds in their net inflows recently. So far, in 2012, more than $20 billion has flowed into bond funds of various types, while $4.8 billion has gone into stock funds.

As the Wall Street Journal reported yesterday, one of the drivers behind the growth in bond funds has been the high-yield variety, or what used to be known as junk bonds. High-yield-bond funds have actually drawn more money this year - $11.8 billion - than investment-grade bond funds, which have drawn only $9.9 billion.

The surprising thing about this is that high-yield bonds don't have the greatest track record lately. In 2011, investment-grade bonds showed a higher return than junk bonds, by a margin of 8.1 percent to just 4.98 percent for junk. This year, the return on high-yield bonds has even dropped a bit further, to 4.74 percent, while the S&P 500 is now up 8.6 percent for 2012.

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