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Investors Bail on Junk Bonds

Investors ditched junk bonds for the fourth week in a row, apparently spooked by the European debt crisis and signs of more sluggish economic growth in the U.S.

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High-yield bond mutual funds and ETFs lost $2.9 billion in the week ending June 6, according to fund researcher Lipper. The bulk of that, $2.1 billion, was pulled out of mutual funds — which are mainly used by retail investors – making it the third highest weekly outflow ever for the category.

Investors are worried about lackluster job growth in the U.S. following May’s disappointing jobs report, advisers say. They are also closely watching the crisis in Europe, concerned that Greece could exit the euro zone after its election later this month. The turn away from high yield may have also be a sign investors are still shaken by a large move from an institutional investor last month that led to outflows for all high-yield ETFs for the week, analysts say.

To be sure, high-yield funds are better equipped to handle large moves because they’re bigger than they were in recent years. There are $26 billion in high-yield ETFs, close to an all time high of $29 billion reached in early May, according to Lipper.  Still, “these moves are rare,” says Brad Durham, managing director at EPFR Global, a fund research firm.

In the week ending May 16, one institutional investor pulled $788 million out of the $10.5 billion SPDR Barclays Capital High Yield Bond fund (JNK)– enough to lead to net outflow of $917 million for all high-yield bond ETFs, according to fund tracking firm Lipper. That move reminded investors the degree to which institutional players can impact markets with large trades, says Jeff Tjornehoj, a senior research analyst at Lipper. Prior to that move, high-yield ETFs had only one week of outflows for the year.

Experts say the redemption that scared off investors wasn’t a true outflow from the fund.  Instead, the institutional investor redeemed its ETF shares in exchange for the bonds it invested in. Certain institutional investors, so-called “authorized participants,” can create and redeem ETF shares when they own bonds that track the appropriate index. The practice happens on a daily basis, but investors get concerned when they see such large moves from a single institutional player, says Tjornehoj. “There’s always been a concern that your Main Street investor is at a disadvantage relative to the Wall Street investor,” he says. “Some people watch those activities believing that the ‘smart money’ knows something that they don’t.”


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