Tentative Rally Seen In Junk Bonds Issues

JUNK bonds - viewed by many Americans as the bogymen of the investment industry - may be coming back. But don't expect any sudden surge in the controversial financial instruments. Junk bonds are high-yield, high-risk bonds issued by young or relatively unknown companies, or companies that have difficulty winning an investment-grade rating for their debt issues.

Many analysts here believed that the junk bond market would have a difficult time rebounding from the collapse in mid-February of the investment house of Drexel Burnham Lambert, which had been the driving force behind junk bonds.

Definitive evidence is not yet available, as of this writing, but junk bond funds apparently had at least a tentative rally during the past few weeks. Unfortunately for junk bond holders, that was not enough to overcome the pounding that junk bonds took during the first quarter of this year, when junk bonds funds lost slightly over 4 percent of their value, according to analysis by Lipper Analytical Services Inc.

At the least, a consensus is growing here that junk bond prices may well have hit bottom and are now starting to inch back up. Indeed, junk bond price indexes rose during March, the first time they have done so this year.

``It looks as though junk bonds rallied during March,'' says A. Michael Lipper, president of Lipper Analytical Services. ``There's normally a rally after a long decline. But it's going to take some more time before we can say with any certainty that we've got a definite trend here,'' he says.

Against this somewhat calmer background, some individuals and institutional buyers are believed to be returning to the junk bond market. Case in point: The three high-yield bond funds of Massachusetts Financial Services have recorded ``modest sales gains'' recently, says Joan Batchelder, portfolio manager for the funds.

She believes there is a ``better tone'' about the entire junk bond market now, compared with several months ago, when many investors worried about defaults by companies issuing junk bonds.

A POSSIBLE junk bond rally may be partly explained by rumors that RJR Nabisco Inc. was going to redeem some of its outstanding junk bonds during the months ahead, says George R. Mateyo, president of Carnegie Capital Management Company, based in Cleveland.

But Mr. Mateyo, for his part, believes that the current ``rally'' in junk is more mythical than actual - more of a rally ``in the press'' than a reflection of any actual gains by junk bond funds.

His own Carnegie Cappiello Diversified High Income Fund, for example, a junk bond fund, is still largely invested in US government securities rather than junk bond issues. ``We're not making a full plunge in junk bonds,'' says Mateyo, who says he believes that preserving principle is as important for investors as making potential gains from a still risky investment.

Fixed-income funds in general were down during the first quarter, off about 1.4 percent, according to Lipper Analytical Services. High-yield corporate junk bond funds were off 4 percent. But of virtually all major categories of mutual funds - stock funds as well as fixed income bond funds - most were down slightly during the quarter, reflecting the slowing of the overall US economy.

Stock funds, although down 2.3 percent (based on total return, i.e., price changes and dividends), still managed to beat the broad market. Standard & Poor's 500 stock market index fell 3 percent during the quarter.

During the first quarter, only two key fund categories - science and technology and funds directed at Europe - showed gains, according to Lipper.

But looking at the overall category of bond funds, any significant gains in junk bonds cannot help but reassure the scores of pension funds, financial institutions, and private individuals who are still active in the $210 billion junk bond market.