Investors flee U.S. corporate junk debt on inflation, Omicron concerns

CHICAGO( Dec 2) - Worries over surging inflation and a new variant of the coronavirus are roiling the U.S. corporate junk bond market, though some believe the tumble could draw investors seeking higher yields.

November marked the worst month since the start of the pandemic for the bonds of low-rated companies, with high-yield bonds notching an average return of minus 1.03%, the lowest since March 2020, according to Morningstar Direct data.

Spreads, which indicate the yield premium investors demand to hold junk-rated debt over safer U.S. Treasuries, also widened the most since the beginning of the COVID-19 pandemic.

Among the factors driving the moves were fears that higher inflation will force the Federal Reserve to normalize monetary policy faster than expected, as well as a rush away from comparatively risky assets on worries over the Omicron variant, analysts said. 

"With most managers sitting on healthy returns for the year, there's a bit of de-risking as well," said John McClain, portfolio manager at Brandywine Global Investment Management.

But McClain said November's poor showing could aid the market in the coming year, with the higher yields that have resulted from falling prices potentially drawing investors.

"We're back to yields that look like the beginning of 2021 and spreads that are reasonably attractive here," he said. "It sets the asset class up well for investor demand going into 2022."

The option-adjusted yield spread of the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, increased by 51 basis points in November, the biggest monthly jump since March 2020.

Reuters