Concerns about the effect of the Year 2000 on both computers and corporate profits could keep junk-bond demand cool for awhile, Paul says. And analysts note that dealers are growing warier of holding large inventories of junk bonds before the end of the year, which could further depress prices.

'Supply Exceeds Demand'

All this underscores a growing realization about the Y2K impact on the markets. While the end of the century is raising challenges for computer chips, many investment professionals say it's also affecting how investors view more speculative investments, including junk bonds. In the past four weeks, investors havepulled out more than $1.2 billion from junk-bond funds, which now have assets totaling $111 billion, says AMG Data Services, Arcata, Calif. During the same time period, investors have put money into higher-quality corporate bonds.

"Right now, supply exceeds demand" in the junk-bond market, "and most of it seems related to Y2K," says Roger King, portfolio manager of the Dreyfus High Yield Securities Fund. King predicts that Y2K will be "one of the biggest momevents in world history," but says many investors are taking precautions by putting money elsewhere. "It's like there's no chance of rain, but people take an umbrella anyway," says Peter Andersen, a high-yield manager at Conseco High Yield Fund.

Despite the fear factor, junk-bond funds have performed admirably. Junk-bond funds have risen on average 2.5% for the year through Thursday, according to mutual-fund tracker Lipper Inc, Summit, NJ that's a weak figure compared with many stock funds, but well ahead of other bond funds. Treasury-bond funds andhigher-grade, lower-yielding corporate-bond funds have struggled because higher interest rates have hurt prices of securities in Treasury-bond and high-grade corporate-bond portfolios.

The Wall Street Journal