Seeking to take advantage of rising interest rates and a burgeoning supply of nonrated debt, Colonial Mutual Funds has reopened its high-yield municipal bond fund for a limited period.

The $115.6 million Colonial High Yield Municipal Fund, which reopened at the beginning of the month, hopes to gain up to $50 million in new assets before closing on Sept. 30, said Bonny E. Boatman, a Colonial senior vice president and portfolio manager.

So far, Colonial has collected several million dollars in new assets for the fund, Boatman said, declining to give specifics.

The fund was created in 1992.

Limiting the asset growth of high-yield portfolios is a common practice for a number of mutual fund companies.

Massachusetts Financial Services, for example, first closed its high-yield municipal fund on June 30, 1985, slightly more than a year after its February 1984 inception, said John Reilly, a Massachusetts Financial spokesman.

The MFS Municipal High Income Fund has been reopened three times since then, in 1989, 1990, and earlier this year.

In June, the fund reopened for one day, during which it collected $186 million in new assets, Reilly said. Assets now total about $1.01 billion.

Boatman said that Colonial periodically closes its high-yield fund to new investment when junk bond issuance falters or interest rates decline.

During the closure period, current shareholders can still buy and sell fund shares, Boatman said.

If the fund remained open to new investments, an influx of cash could cause the fund's net asset value to falter. During periods of limited junk bond supply, the additional cash would have to be invested in higher-rated, lower-yielding securities, which would weaken the fund's total return.

"It's really to protect the share-holders against dilution," Boatman said.

The limited availability of high-yield and nonrated securities makes it difficult to keep a high-yield municipal fund open all of the time, Boatman said.

"There aren't a lot of high-yield bonds. There's Denver air and then there's Denver air," Boatman said, pointing to one of the market's most well-known and widely traded high-yield securities, bonds issued for the Denver International Airport project. "There really isn't a liquid, tradable high-yield municipal market."

In addition to a limited amount of issuance, a large number of securities often obtain a letter of credit or other financial guarantee, eliminating them from the high-yield market.

This year, however, rising interest rates have helped to increase the amount of nonrated debt, the portfolio manager said.

"When rates stabilize you can put a deal together again," Boatman said. She explained that as rates have stabilized at higher levels, issuers and investors have felt more confident in structuring and bringing to market new nonrated offerings.

About 50% of Colonial's high-yield fund is invested in nonrated securities, Boatman said. The fund also contains about 18% of triple-B rated, investment-grade bonds and 12% of double-B, or speculative-grade, securities. In addition, the fund holds about 7% of triple-A rated insured bonds.

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