Biggest Buyers Stampede From Junk Bonds on Loss:

bloombergCourtesy of Lisa Abramowicz

The biggest buyers of junk bonds are in retreat as exchange-traded funds suffer unprecedented withdrawals with the debt facing its first losses in eight months.

The outflows sent the combined value of the five biggest junk-debt funds down 7 percent from a four-month high in January to $29.8 billion, according to data compiled by Bloomberg. State Street Corp.’s $11.9 billion fund reported withdrawals of about $988 million in the 12 days ended Feb. 13, the longest stretch since August 2011.

A pullback three times bigger than that for mutual funds which cater to individuals suggests investors such as hedge funds and banks are cherry picking rather than investing in the broader market, said Peter Tchir of TF Market Advisors. Almost six years after the first high-yield ETF was created, the funds have been drawing the interest of institutions seeking rapid entries and exits with securities that traditionally were traded over the counter.

Investors who poured $8 billion into junk ETFs in 2012 when the securities gained 15.6 percent are fleeing as Morgan Stanley strategists predict the debt will return 3.1 percent this year, less than its coupon. Dollar-denominated junk bonds lost 0.4 percent in the week ended Feb. 6, when the funds reported an unprecedented $1.1 billion of withdrawals, according to Bank of America Merrill Lynch index data.

Prices are dropping from a record 105.9 cents on the dollar on Jan. 25 as concern deepens that values are unable to go much higher with interest rates rising from record lows and after four years in which average annualized returns reached 21.6 percent, compared with 3.6 percent losses in the preceding period.

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