Written by Karen Pirouge
CHICAGO (Reuters) – Concerns about rising inflation and a new variant of the coronavirus are roiling the junk US corporate bond market, though some believe the pullback could lure investors looking for higher yields.
November saw the worst month since the pandemic began for low-rated corporate bonds, with high-yield bonds yielding an average return of 1.03%, the lowest since March 2020, according to Morningstar Direct data.
Spreads, which indicate the yield premium that investors demand to hold junk-rated debt on safer US Treasuries, have also widened the most since the start of the COVID-19 pandemic.
Analysts said that among the factors driving the moves were concerns that higher inflation would force the Federal Reserve to normalize monetary policy faster than expected, as well as a rush away from relatively risky assets due to concerns about the Omicron variable.
“With most managers having healthy returns for the year, there is also a bit of risk involved,” said John MacLean, portfolio manager at Brandywine Global Investment Management.
But MacLean said November’s weak performance could help the market next year, with higher yields brought on by lower prices likely to attract investors.
“We’re back with returns that look like the start of 2021 and reasonably attractive spreads here,” he said. “It defines the asset class well for investor demand by 2022.”
The option-adjusted yield differential for the US ICE BofA High Yield Index, a commonly used benchmark for the junk bond market, rose 51 basis points in November, the largest monthly jump since March 2020.
Chart: Junk bond spreads expand, https://fingfx.thomsonreuters.com/gfx/ce/zjpqkykeypx/Pasted%20image%201638376953981.png On Tuesday, the spread was the widest since February at 367 basis points.
Refinitiv Lipper data showed that funds also saw their biggest net weekly outflow since March in the week ending November 24, as investors pulled a net $3.3 billion from this category.
Among the victims of Omicron’s defeat last week was the iShares iBoxx high-yield corporate bond trader, which plunged to its lowest level since November 2020 in frantic risk-free trade.
Inflation, which erodes interest payments on bonds over time, has been a major concern: A November survey of US credit investors by Bank of America found that 73 percent of inflation was their biggest concern, up from 66 percent in September and higher. share since 2012.
US consumer prices accelerated in October, as Americans paid more for gasoline and food, resulting in the largest annual gain in 31 years.
Concerns about supply chain bottlenecks were another factor that may have affected companies classified as junk, according to Colin Martin, a fixed income analyst at the Schwab Center for Financial Research.
“Anything that could negatively impact your cash flow is a risk,” he said.
Martin added that with three straight months of losses in high-yield bonds, some investors may have decided to take profits after a good year.
Total returns on the ICE BofA high-yield index to date, at 3.4%, were higher than those of other ICE indexes that track investment-grade companies, as well as municipal bonds, according to ICE Data Services.
“Some investors said let me hurry to the exits now and get out of here and find a better chance of getting back inside ‘because before the start of November there was very little improvement in the high yield,’” Martin said.
(Reporting by Karen Pirog; Editing by Ira Eosbashvili; Editing by Sonia Hepstel)