Bloomberg News

Double-Decker Funds Roil Junk Bonds as Real Drops, Barclays Says

September 30, 2011

Sept. 30 (Bloomberg) -- Funds created for Japanese investors to wager on junk bonds and emerging-market currencies are contributing to the biggest losses in U.S. high-yield debt in almost three years, according to Barclays Capital strategists.

The so-called double-decker funds, which seek to increase yields by pairing junk-bond investments with swaps on currencies including the Brazilian real, have been forced to sell debt they hold as the real plunged more than 14 percent this month against the U.S. dollar, strategists led by Bradley Rogoff wrote in a report today. That’s prevented high-yield notes from rallying even on days the stock market climbed, the strategists said.

“Bond managers have been forced to sell assets to settle the currency trades,” the New York-based analysts said. “The currency positions are typically reset monthly, and while the selling pressure may dissipate next week after month-end, these currencies are likely to remain volatile.”

High-yield, or junk, bonds are rated below BBB- by Standard & Poor’s and Baa3 by Moody’s Investors Service. U.S. high-yield bonds have lost 6.7 percent since the end of July, Bank of America Merrill Lynch index data show, as Europe’s debt crisis has caused investors to shun riskier assets and the U.S. economic recovery shows signs of faltering. The decline is the biggest two-month slide since the period ended November 2008, when credit markets seized up following the collapse of Lehman Brothers Holdings Inc.

Offshore funds, such as the double-deckers, have come to represent 6 percent to 9 percent of buyers in the more than $1 trillion high-yield debt market in recent years, the strategists said. Funds started in Japan in the second quarter of 2009 that use Brazilian real swaps to increase returns from junk debt grew to as much as $48 billion and are at about $44 billion, JPMorgan Chase & Co. strategists said in a Sept. 15 report.

Editors: Pierre Paulden, Mitchell Martin

To contact the reporters on this story: Shannon D. Harrington in New York at; Lisa Abramowicz in New York at

To contact the editor responsible for this story: Alan Goldstein at

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