Junk Bonds in U.S. Poised for Biggest Retreat in 4 Months

Speculative-grade bonds in the U.S. are poised for their biggest weekly loss since May as buyers withdraw money from domestic funds that buy the debt for the first time in more than three months.

The securities lost 0.6 percent this week through yesterday after gains in the five previous periods, Bank of America Merrill Lynch index data show. Funds that buy the notes reported $5 million of outflows, with investors pulling $65 million from exchange-traded funds, according to a Sept. 27 Bank of America Corp. (BAC) report.

Yields on speculative-grade bonds closed at 7.125 percent yesterday, up from a record low 6.948 percent reached on Sept. 19 as an unexpected drop in demand for U.S. durable goods other than transportation signaled a slowdown in business investment and exports. Investors sold the debt as concern mounted that the European Central Bank’s current bailout funds would be insufficient to prevent a sovereign default.

“There was legitimate selling for the first time,” said Timothy Gramatovich, chief investment officer at Peritus Asset Management LLC. “This is the first week in recent memory that we actually saw bonds offered out there.”

Investors yanked 3.9 million shares, worth about $157 million, from State Street Corp.’s ETF that buys junk bonds on Sept. 27, the biggest outflow since May 21, according to data compiled by Bloomberg. U.S. high-yield bond funds reported net withdrawals of $310 million, the first decline after 13 consecutive weeks of inflows, according to Lipper.

‘Hand-Wringing’

European Central Bank Executive Board member Joerg Asmussen said Greece may need more aid, joining the International Monetary Fund in expressing doubt that the two existing bailouts will suffice.

Even if Greece meets its budget goals, “there could be additional need for external financing because, for example, growth is worse than was initially anticipated,” Asmussen said today.

“Headlines out of Europe are causing people to pull back on their riskier allocation,” said Jeff Tjornehoj, head of Lipper Americas Research. “I could see more hand-wringing in Europe causing additional outflows from high yield.”

To contact the reporters on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net; David Holley in New York at dholley8@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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