By Sam Forgione
NEW YORK, Aug 14 (Reuters) - Several of this year's top-performing bond funds are sticking with high-yield "junk" bonds, convinced that a global hunt for returns will keep the speculative-grade U.S. corporate debt on course for its best year since the financial crisis.
With major central banks' money-printing and near-zero policy rates keeping government bond yields low or even negative, investors have been piling into riskier U.S. corporate bonds, lifting prices by almost 18 percent since February. (Graphic: http://tmsnrt.rs/2bcRnwQ )
Managers of those best-performing funds told Reuters they expected the higher returns to keep outweighing concerns about the rate of bond defaults, which hit a six-year high of 5.1 percent last month. (Graphic:http://tmsnrt.rs/2aL5Jb8)
In the energy sector, more than one in seven bonds have gone into default, according to Fitch Ratings. A 70 percent recovery in U.S. crude prices since February, however, has helped ease the concerns about the sector's health.
"There is a lot more room to run for high-yield," said Ford O'Neil, manager of the $25.2 billion Fidelity Total Bond Fund . He said the fund had about 18 percent of its assets in speculative-grade securities, with about half of that in high-yield corporate bonds.
So far the upswing has delivered a total return of over 13 percent this year, according to Barclays data, but not everyone is convinced it will continue.
The rally "feels very, very long in the tooth," said Keith Berlin, director of global fixed income and credit at investment advisory firm Fund Evaluation Group.
Average junk bond prices have risen to 98.52 cents on the dollar as of Thursday from a 6-1/2- year low of 83.82 cents touched on Feb. 11. At 6.48 percent, average yields are nearly a third below long-term average of around 9.35 percent, according to Barclays data.
Bond giant Pacific Investment Management Co, Pimco, which oversees $1.5 trillion in assets, has been reducing junk bonds to "neutral" positions after their huge run.
Yet managers of bond funds at Loomis Sayles and Wells Fargo, along with Fidelity, offered several reasons why high-yield bonds remained attractive.
Steady U.S. economic growth is one factor supporting the bonds, they said, even with one Federal Reserve interest rate rise factored in.
As of Thursday, those funds have beaten at least 95 percent of their peers, according to Morningstar.
PIPELINES AND BANKS
Fidelity's O'Neil said the fund held junk bonds from all sectors, but was particularly bullish on oil pipeline companies and financials. He said pipelines were less sensitive to swings in oil and gas prices, while tougher capital requirements had made banks safer.