Demand for junk bonds ebbs as investors rein in risk-EPFR

By Sam Forgione

NEW YORK, Oct 5 (Reuters) - The year-long rally in junkbonds hit a bump in the road this past week, with investorsbeginning to show concern about high-yield debt valuations,analysts said.

Fund tracking firm EPFR Global reported Friday thatinvestors pulled $410 million out of junk bond funds, the firstoutflows from high-yield debt funds in 17 weeks.

Michael Jones, chief investment officer of RiverFrontInvestment Group, said investors are beginning to worry aboutthe valuations on high-yield bonds and whether they are takingon too much risk.

The retreat from junk bonds comes at a time when investorsare searching for higher-yielding assets in the wake of theFederal Reserve's move to push down borrowing costs by buying up$40 billion in mortgage securities a month. But the outflows mayindicate that, in searching for yield, investors are still beingdiscriminating in their buying.

Investors "are not ready to make the massive,the-world-is-OK trade," said Colleen Denzler, global head offixed income strategy at Janus Capital Group, with over $152billion in assets.

That may explain why U.S.-focused stock funds saw $3.37billion in outflows in the period ending Oct. 3, according toEPFR. And U.S. bond funds that don't invest mainly in junk bondstook in $2.54 billion in new money.

Globally, bond funds took in $5.53 billion during theperiod.

The outflows from stock funds came even as the benchmark S&P500 's rose 1.23 percent during the reporting period. O nFriday, the benchmark 10-Treasury note was yielding1.7288 percent.

But investors didn't abandon the appetite for risk and yieldaltogether.

Emerging market bond funds took in $1.05 billion in newmoney. And bond funds that hold risky European bonds attracted amodest $287 million.

The yield and performance of emerging markets bond fundscontinue to drive inflows, said Jeffrey Rosenberg, chiefinvestment strategist for fixed income at BlackRock Inc.

The Barclay's Capital Global Emerging Markets Index is up15.09 percent for the year, according to Lipper.

The choppy asset allocations reflect continuing concernabout the strength of the U.S. economic recovery and the abilityof Spain and other European nations to deal with their fiscalwoes.

On Friday, the news from the U.S. Department of Labor thatthe nation's unemployment rate dropped to 7.8 percent, a nearfour-year low, could provide a lift to investor confidence incoming weeks.

In intraday trading following the release of the jobsnumbers, the yield on the 10-U.S. Treasury rose to 1.73 percent,up from 1.63 percent earlier in the week. The jump in the yieldis an indication that some investors believe a stronger U.S.economy could lead to more inflation.

But not all analysts are convinced the better-than-expectedjobs numbers will have much lasting impact on investors.

"While that's an improvement, it's just not as big of animprovement in the labor market that the headline decline wouldotherwise suggest," said Rosenberg of BlackRock, who pointed outthat participation rates remain low and that part-time jobsaccounted for much of the improvement.

(Editing by James Dalgleish)