Investors cash out of junk bonds Contagion fears from Europe and signs that the US economy is faltering are causing investors to cash out of junk bonds amid the broader retreat from risky investments. Outflows have accelerated for the past four weeks from funds that specialise in low-rated corporate debt. Last week's redemption was the largest in 2012. Junk bonds face a potentially tough summer. At about 5 per cent, the return on them, according to a Barclays index is slightly lower than the 5.4 per cent advance for the S&P 500 so far this year. "From disappointing US data, to mounting problems in Europe and losses in the stock markets, this combination of factors is contributing to investors" caution," said Matthew Lemieux at Lipper, the data tracker. Another blow came at the start of June when the ratings of Ford Motor and Ford Motor Credit were upgraded. This sent $30bn of Ford debt out of the junk bond market and prompted changes to junk bond portfolios. "Because of the size of its total debt outstanding, Ford's departure from the high-yield index is an important technical factor for the market," said Edward Marrinan, head of macro-credit strategy at RBS Securities. High-yielding junk bonds have been a favourite this year among portfolio managers, who have sought better returns than on lower yielding US Treasuries. A strong rally in equities at the start of 2012 boosted optimism over the outlook for US corporations. Investors last week withdrew nearly $3bn from US exchange-traded and mutual funds that invest in junk bonds, according to Lipper. It was the fourth successive week of outflows, which were the largest since August 2011. In contrast, investment-grade corporate funds experienced inflows of $819.7m, a signal that some investors may be rotating out of junk bonds to less volatile lower yielding assets. The yield on the Barclays US Corporate High-Yield bond index is about 8 per cent, more than double that on the bank's index for investment grade bonds. Junk bonds rose late last week as risky assets, including stocks, again rallied after central bankers took steps to show that they will support the global economy. "Over the long run, there has been only a modest correlation between high yield bonds and stocks," said Martin Fridson, head of credit strategy at BNP Paribas Investment Partners. "But the recent environment of risk-on/risk-off has made all risk assets tend to move together," he added. Under those conditions, high yield should outperform stocks in a bear market because they are more senior obligations and therefore are less volatile. The reverse, of course, would be true in a bull market, he said.