As Bond Prices Fall, Strategies Shift; Investors Move to Guard Assets as Companies Race Into Market to Borrow Funds

Updated June 6, 2013, 7:48 p.m. ET

As Bond Prices Fall, Strategies Shift

Investors Move to Guard Assets as Companies Race Into Market to Borrow Funds

By KATY BURNE, MIKE CHERNEY and CAROLYN CUI

A sharp fall in bond prices has sent investors scurrying to protect themselves amid fears that rising interest rates will put an end to decades of strong returns. The U-turn is forcing some companies to accelerate fundraising plans to take advantage of investor demand while it lasts.Kathy Crusco, the chief financial officer at software company Epicor Software Corp., waited months to borrow money. On Monday, her bankers told her to pull the trigger immediately to avoid paying higher rates amid the debt-market selloff.

Investors still bought $400 million of the junk bonds with a 9% interest rate in just one day, a rare quick deal for a low-rated company. The borrower, Epicor parent Eagle Midco., is rated triple-C-plus. Ms. Crusco plans to use the cash to pay a dividend to Apax Partners, the private-equity owners of Epicor.

All of the credit markets, ranging from ultrasafe Treasurys to riskier investments such as below-investment-grade, or junk, bonds were volatile this week as investors try to interpret new comments from several Federal Reserve officials that they are considering tapering off their purchases of bonds. The Fed’s bond-buying program has supported the markets and kept interest rates low since the financial crisis.

Investors and borrowers have pulled back ahead of a report on U.S. jobs set for release Friday morning. Unemployment is a crucial element in the Fed’s formula for making decisions about its support for the economy. Mom-and-pop investors and others pulled $9.1 billion from bond mutual funds and exchange-traded funds in the week ended Wednesday, more than they have since a $12.6 billion pullback in October 2008 at the height of the financial crisis, according to fund tracker Lipper.

“We’re seeing the bleeding everywhere in fixed income,” said Jeff Tjornehoj, head of Lipper Americas Research.

Investors are selling bonds most sensitive to higher interest rates, those that mature in longer time frames. A spate of coming bond deals hangs in the balance, as corporate treasurers and chief financial officers await clarity about how much they may pay to borrow.

When interest rates go up, existing bonds usually fall in price. New bonds, which are priced relative to benchmark interest rates, offer higher interest payments making them more attractive to investors.

“You have had Fed members out there talking” about tapering their monetary-easing policies, said Randall Parrish, head of high-yield bonds at ING U.S. Investment Management, which has $130 billion of fixed-income assets under management. “The fear is that, once they start, that boost that has been given to all assets—risk assets in particular—starts to fade away.”

The yield on junk bonds last month dipped below 5% for the first time on record, according to Barclays BARC.LN -4.11% index data, but the selloff has taken that yield over 6% as of Wednesday. Bond yields rise when their prices fall.

A record $4.63 billion of money was removed from junk-bond mutual funds and exchange-traded funds in the past week. The prior record was $3.4 billion pulled out in June 2011. Investors withdrew $1.5 billion from mutual funds and exchange-traded funds that invest in municipal bonds, the biggest weekly outflow of cash from those funds since December when investors removed $2.3 billion.

U.K. energy company Petrofac Ltd. PFC.LN -1.98% canceled an investment-grade bond offering this week, saying the shift in market conditions meant it would have to pay too much to borrow. Below-investment-grade companies, including Quicksilver Resources Inc., KWK -0.98% are expected to sell junk bonds in coming days, but investors have been demanding higher rates for the bonds, said people familiar with the sales.

Approach Resources Inc. AREX +0.72% sold junk bonds with a 7% interest rate on Thursday, at the upper end of the suggested price range. Representatives for Approach and Quicksilver declined to comment.

“The question is going to be how many of these deals get done and at what level, because I am not sure they are getting a lot of attention right now,” said Mr. Parrish of ING.

Some of the credit markets rebounded somewhat Thursday amid uncertainty about the U.S. payrolls report. The 10-year Treasury note rose 7/32 in price to yield 2.072%, compared with 2.098% on Wednesday. But volatility in the Treasury market is heading higher. Bank of America BAC +0.84% Merrill Lynch’s MOVE Index, which measures price swings in U.S. government debt, has recently spiked 70% to 83.64, the highest level in about a year.

Bill Irving, a portfolio manager of government bonds and mortgage debt with Fidelity Investments, said he is protecting his bond funds from “a sharp move in interest rates” by buying options and other derivatives to offset losses in bonds.

Some investors noted the markets have gone through previous selloffs driven by fears of rising interest rates, including in January of this year, when the 10-year Treasury note reached 2% for the first time in nine months on optimism about the U.S. economy. It could be another “false move,” said Charles Jones, a finance professor at Columbia Business School.