A Bond Market Collapse Is Imminent As Junk-bond ETF Short-interest Soars And Mutual Fund Giants Began Turning Down People Hoping To Invest In Funds That Buy Junk Bonds
December 2nd, 2012
Desperate for Returns, Investors Pour Into Junk
The money manager’s job is supposed to be straightforward: Take people’s cash and put it to work. The more money that comes in, the bigger the manager’s paycheck.
So why would two of the country’s largest fund managers tell would-be investors in junk bonds—the common name for bonds issued by companies with the lowest credit ratings—to go away?
The short answer is that it’s for their own good. The market for junk bonds, the pros say, has become so popular that it’s dangerous.
Thanks largely to the unsteady economy, interest rates on U.S. government bonds have fallen to record lows. And individual investors remain leery of the stock market.
Desperate for better returns, they’re sinking billions into higher-paying bonds backed by businesses with bad credit scores. Those deeply indebted companies have borrowed a record amount from investors and are increasingly using the money in ways that could strain their ability to pay it back.