Fed Rate Hike Sees Junk Bonds Rally

Junk bonds rallied Wednesday, showing that investors in speculative bonds and high-yield mutual funds care about the potential benefits in the Federal Reserve’s 0.25% rate hike and signs of more hikes in 2016.

Most of those investors looked past the rate hike’s heightened risk to stressed companies — including many oil and materials firms — to pay bills, including debt service.

“Tighter monetary conditions driven by a stronger U.S. dollar and higher rates will not help those already stressed credits,” said Regina Borromeo, head of international high yield at Brandywine Global Investment Management.

But junk rallied as investors focused on firms and sectors that benefit from a generally stronger economy, said David Joy, chief market strategist of Ameriprise Financial.

The Fed action overshadowed the end, at least for the moment, of the stampede out of asset managers, a group tainted by the shock of the Third Avenue Focused Credit Fund collapse.

Individual investors finally agreed with them on Wednesday. IShares iBoxx $ High Yield Corporate Bond ETF (ARCA:HYG) rallied Tuesday and Wednesday. So did SPDR Barclays High Yield Bond (ARCA:JNK).

Amid the S&P 500’s 1.1% gain Tuesday, IBD’s Finance-Investment Management industry group rose 2%. It added 0.5% Wednesday.

Individual investors weren’t ready yet, yanking $ 511 million from high-yield bond mutual funds.

After digesting several days of stock market news about Focused Credit and high-yield in general, it was their biggest daily net redemption this month. It brought month-to-date withdrawals to $ 1.2 billion, or 2.3% of assets, according to TrimTabs Investment Research.

In contrast, even investors in Third Avenue’s corporate parent, Affiliated Managers Group (NYSE:AMG), saw a 5.7% rally in their shares Tuesday and 4.5% Wednesday. Shares were down 19% month-to-date through Monday.

Shares in other big fund families have acted similarly. Mutual fund giant BlackRock (NYSE:BLK) — which had 34.7% of its assets under management (AUM) in bonds as of July 31, according to Morningstar Inc. — rallied 3.1% on Tuesday and 0.4% Wednesday. It had been down 12% month-to-date through Monday.

Federated Investors (NYSE:FII), which had 46.2% of its AUM in bonds, clocked 1.6% gains on both Tuesday and Wednesday. It had been down 10% month-to-date through Monday.

Return Of Calm?

One reason for the relative return of calm among investors in asset managers’ stocks is that many decided that Focused Credit was not typical of high-yield bond funds.

Focused Credit had 28% of its assets in bonds rated CCC or lower, nearly triple its peers’ average weighting, according to Todd Rosenbluth, director of ETF and mutual fund research for S&P Capital IQ. The fund also had 53% of its assets in bonds that were not rated.

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