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Investors Tiring of Junk Bonds Lift Trades Most Since ’09

The more than doubling of their money since 2008 has some junk-bond investors getting restless.

Trading in the highest-risk corporate debt is climbing as money managers show a willingness to part with securities that handed them 144 percent returns in five years. Average volumes increased 5 percent in April from the previous three months, the first advance for the period since 2009, according to data compiled by the Financial Industry Regulatory Authority.

The impetus for bowing out? While firms including Nuveen Asset Management LLC still see value in the notes, Apollo Global Management LLC, Marathon Asset Management LP and DoubleLine Capital LP have said there’s too much risk in the credit markets. The bonds have been among the biggest beneficiaries of the Federal Reserve’s unprecedented stimulus.

“You have that differential of opinion,” said Jon Sablowsky, the head of trading at Brownstone Investment Group LLC in New York. “There are some people who are sort of taking their profits off the table.”

Last month, trading surged to an average $6.9 billion each day, compared with $6.6 billion in the first three months of the year, Finra data show. Average trading in investment-grade bonds fell to $13.6 billion last month from $14.3 billion in the first quarter.

Junk bonds in the U.S. yield 6.03 percent, compared with 3.09 percent for securities rated above Ba1 by Moody’s Investors Service and higher than BB+ by Standard & Poor’s, according to Bank of America Merrill Lynch index data.

Cash Yanked

The jump in trading partly can be explained from new junk-bond sales, which soared to $47 billion in April, the biggest month of issuance this year, data compiled by Bloomberg show.

That’s not the whole story, though. As sentiment has shifted, investors yanked $631 million from U.S. funds that focus on the notes in the week ended April 30, the biggest outflow since February, Royal Bank of Scotland Group Plc data show.

“It is certainly hard to find reasons to embrace the asset class,” Marvin Loh, a senior fixed-income strategist at BNY Mellon Global Markets, wrote in a May 2 report, adding that the “continued largess of the central banks” means there will still be demand for the debt from investors seeking yield.

What we can say is that growing angst in the market signals more business for junk-bond traders in the months ahead.

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