Money, may be extra, poured into junk bonds
So why would two of Americaís 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 itís for their own good. The market for junk bonds, the pros say, has become so popular that itís dangerous.
Thanks largely to the unsteady economy, interest rates on US government bonds have fallen to record lows. And individual investors remain leery of the stock market.
Desperate for better returns, theyíre sinking billions into higher-paying bonds backed by businesses with bad credit scores. Those deeply indebted firms have borrowed a record amount from investors and are using the money in ways that could strain their ability to pay it back.
Earlier this year, two mutual fund giants, T Rowe Price and Vanguard, began turning down people hoping to invest in funds that buy junk bonds. Both said they were running out of worthwhile places to put customer money. ďItís getting harder and harder to find places to invest,Ē says Michael Gitlin, director of fixed-income at T Rowe Price. He says investors are getting paid record-low interest rates for taking on much more risk.
Consider the numbers: Junk-bond sales in the US snapped the single-year record in October and have kept climbing. Sales for the year totaled $324 billion as of November 28,
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