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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Crimson Ghost who wrote (3139)	12/10/2003 3:24:11 PM
From: russwinter	Respond to of 110194

Reuters Junk bond funds may be next focus of scandal probe Wednesday December 10, 3:09 pm ET By Mark McSherry NEW YORK, Dec 10 (Reuters) - Out-of-date pricing of junk bond mutual funds could be the next target for regulators in the widening improper trading probe, analysts said on Wednesday. The experts said some bonds held in high-yield funds are not traded for days or weeks at a time and if their prices are not regularly adjusted or "fair valued" to better reflect their markets, they can be exploited by arbitrageurs. This type of "stale price arbitrage" has become broadly known as market timing. It harms returns for long-term shareholders and is at the root of the current mutual fund scandals. Exploitation of stale prices in stock funds has already been exposed and moves are under way to stamp it out, but analysts said bond funds too should be investigated. "I would encourage (regulators) to look at this," said Andrew Clark, bond fund analyst at investment research firm Lipper Inc., a unit of Reuters Group Plc. (London:RTR.L - News) "So much attention has been focused on the equity side that not too many people have been looking on the bond side. "Out of all the bond funds, high-yield funds are most prone to stale prices. A price can hang around for a number of days -- in some cases it can be a month or more. They tend to be the most egregious examples of stale prices." Junk bonds are rated below investment-grade but pay higher yields than safer bonds due to a bigger risk of default. Battered in 2002 by rising defaults and bankruptcies, junk bonds rebounded this year as the U.S. economy headed toward recovery and default rates declined. According to AMG Data Services, U.S. junk bond mutual funds took in a record $26 billion year to date by Dec. 3. Total returns on junk bonds, which include price gains and interest, have exceeded 26 percent year to date, according to Merrill Lynch & Co. (NYSE:MER - News). By comparison, investment-grade corporate bonds have gained about 7 percent and Treasuries are up about 1.2 percent. Mutual fund watchdog Roy Weitz of FundAlarm.com said he would be surprised if high-yield bond funds did not have problems with stale prices. "It is reasonable to assume there are some pricing inefficiencies in the high-yield area," said Weitz. "It would not surprise me at all if they found some problems there ... In the early part of the scandal there were hints that bond funds were being market timed. "It does take more brains and more work to exploit the inefficiencies in a bond fund because they would have to do some homework," Weitz added. "They would have to have some idea of what's in the portfolio. In a high-yield fund they would need some insight -- they would need some reason to believe a bond has just been traded at a different price."