Closed-end high-yield bond mutual funds are surging in popularity, according to new research from mutual fund trackers CDA/Wiesenberger, Rockville, Md.
In the first six months of the year, all new closed-end fund offerings attracted more than $5 billion, compared with the $1 billion raised during all of 1997. Of that $5 billion, more than half went into junk bond closed-end funds.
CDA/Wiesenberger's research found that closed-end corporate high-yield bond funds generated about 25% more yield than government bond funds in the past two years, a fact that has not been lost on investors, the company noted.
"With a low interest rate environment, and unstable domestic and international markets, investors are flocking to high yields. Loan default rates are also down, making investors feel more secure in taking on the extra risk of high-yields," CDA/Wiesenberger analysts wrote in their report.
Overall, high-yield bond offerings have been way up to cope with demand for the asset class. Total high-yield bond offerings were $130 billion at midyear; total high-yield bond issues for all of 1997 were half that amount.
As a result of the increased investor appetite for closed-end high-yield bond funds, most of these funds are now trading at an average premium of almost 6% more than their net asset value.
By contrast, CDA/Wiesenberger found government bond funds are trading at a discount of 6% less than NAV.