A pedestrian walks by the New York Stock Exchange
The bonds of triple C and lower-rated companies returned minus 1.4% last month © AP

US junk bonds fell in November by the most in more than a year on fears the spread of the Omicron coronavirus variant will hinder the ability of low-rated companies to repay their debts.

A high-yield bond index compiled by Ice Data Services dropped just over 1 per cent in November, marking only the second month this year in which the gauge has posted a negative total return and its worst showing since September last year.

The decline was driven by a slide in the price of the debt, which offset the interest payments the bonds provide.

It is one of the clearest indications yet of how the emergence of a new strain of coronavirus has prompted global investors to shift away from stocks and bonds of companies that are considered to be most vulnerable to the potential hit to the global economy caused by the new variant.

The selling last month was even more severe for the lowest-rated corner of the market. The bonds of triple C and lower-rated companies returned minus 1.4 per cent, reflecting worries that a boom in financing for risky companies could be knocked by tightening monetary policy or stricter social curbs in response to the new coronavirus variant.

Much of the downturn came on Friday last week, as concerns about Omicron prompted governments to rush to reimpose restrictions in an attempt to stem the spread of infection. Leisure was the worst-hit sector in the debt market on Friday, with airline bonds also suffering.

Column chart of Monthly total return (%) showing Junk bonds suffer biggest losses since September 2020

Yet investors had already grown cautious earlier in November, as high inflation and decelerating economic growth heralded calls for the Federal Reserve to step back from its $120bn-a-month pandemic-era bond-buying programme faster than planned. Comments from Fed chair Jay Powell on Tuesday suggesting the US central bank may accelerate its exit from the bond purchases added to those jitters.

The additional yield above ultra low-risk government bonds, or “spread”, for the high-yield index rose from 3.03 percentage points earlier this month — just marginally above its historic low — to 3.67 percentage points on Tuesday, its highest level since March. Bond yields move inversely to their prices.

“We have not seen these levels in a while,” said Matt Eagan, a portfolio manager at Loomis Sayles. “At the end of the day, the buyer base has not been showing up as heartily as it was before.”

In another sign of the souring sentiment towards the asset class, investors pulled $2.8bn from the high-yield market last week, according to data from EPFR Global, the biggest one-week withdrawal since mid-March this year, when inflation fears were first spooking investors.

Chart showing weekly flows into high-yield corporate bond funds

Investors also pointed to the seasonal slowdown in the build-up to Thanksgiving, with traders looking to book profits and trim risk before trading activity dwindles, as bankers and portfolio managers break for the holidays.

Despite the selling, yields on junk bonds are still in line with levels from around the same time a year ago, signalling borrowing costs will remain near historically low levels for many borrowers.

“It’s quite a change from a stable environment to a big drop off but it’s not as if this is a market panic,” said Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors. “Without the final blow from Omicron it wouldn’t have been so bad.”

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