Junk Bonds Take a Dive

Friday, 26 Aug 2011 10:42 AM

By Dan Weil

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During the spring, high-yield bonds flew high in tandem with the stock market amid optimism about economic recovery.

But now that sentiment about the economy has turned sour and fear has enveloped the stock market, junk bonds are hitting the skids. Buyers are essentially on strike, The Wall Street Journal reports.

Junk bond issuance this month has sunk to its lowest level since December 2008, when the financial crisis was in full swing.

A vicious cycle has begun. Individual investors are taking record amounts of money out of their junk bond mutual funds in fear the funds will slump. That has forced the funds to sell some of their bonds to raise cash, thereby pushing the bond prices down even further.

David Steinberg, a portfolio manager at Mast Capital Management, took a stance against junk bonds last year and raised his bet recently in anticipation of a double-dip recession.

"I am net short and getting shorter," he tells The Journal.

Steinberg obviously isn’t the only one going short.

Economists’ consensus that growth will slow “has a bigger impact on the more highly levered credits," Mark Denkinger, a money manager at Principal High Yield Fund, tells Bloomberg.

"It's been a flight to quality across all asset classes, and within high-yield, it's been a flight to quality as well."

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