Spooked clients junk investments in high-yield bonds

Intensifying concern over Europe’s sovereign debt crisis and the potential spillover for the U.S. economy are creating “panic” in the junk-bond market, according to Pioneer Investment Management Inc.’s Andrew Feltus.

Investors withdrew an unprecedented $2.1 billion from junk mutual funds globally on Aug. 9, research firm EPFR Global said. Relative yields on high-yield bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s, have soared to 730 basis points, the highest since 2009, while returns on the debt have declined 4.6 percent this month.

“There’s clearly a panic going on in the market,” Feltus, who oversees the $2.1 billion Pioneer High Yield Fund, said today in a Radio interview on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene. “Prices are at such a point that you can even survive a recession, but people aren’t looking at the fundamentals. They’re just looking at the technicals, and ‘get me out of here.’”

Feltus’s fund has declined 10.5 percent this month through yesterday, after climbing 17.6 percent in 2010, according to data compiled by Bloomberg.

The extra yield investors demand to hold junk bonds instead of Treasuries has jumped 106 basis points, or 1.06 percentage points, since Aug. 5, when S&P stripped the U.S. government of its top credit grade. That implies defaults between eight and nine percent over the long term, while defaults currently are in the two to three percent range, Feltus said.

“The volatility in the market’s awful,” he said. “Right now you’re trying to hang on.”
–Bloomberg News–