Due to worries about the subprime woes affecting the mortgage market and the risks of high-yield bonds, investors are moving their money out of mutual funds that specialize in these sectors and into better-quality bond funds, such as Treasuries, which are enjoying rising yields, The Wall Street Journal reports.

Up until now, “the generic assumption was that if [a company] had a little bit of cash flow, you could [leverage] the lights out of it,” said Mark Hudoff, a high-yield portfolio manager at PIMCO. “Investors are rejecting that.”

As a result, the value of bond funds has fallen in recent weeks. The average junk bond fund is down 1.5% in the 30 days ended July 6, whereas over the past 12 months ended on that date, it is up 10.5%. Investors have taken notice; in the four weeks ended July 3, investors have pulled $1.6 billion from high-yield mutual and exchange-traded funds. That’s a substantial withdrawal, as year-to-date through July 3, investors had poured $3.7 billion into such funds.

At this point, the average high-yield bond is offering a yield of only three percentage points above U.S. Treasuries. In 2002, the premium was 10 percentage points.

“I wouldn’t be an owner of a high-yield bond fund right now,” said Kurt Brouwer, a financial planner in Tiburon, Calif.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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