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US junk bonds hit by biggest sell-off in over a year

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U.S. junk bonds fell in November from the biggest drop in more than a year, fearing the spread of the Omicron coronavirus variant could hamper the ability of lower-rated companies to repay debts.

A high yield bond index compiled by Ice Data Services fell just over 1% in November, marking just the second month of this year in which the gauge posted negative total return and its worst result since September of Last year.

The decline was caused by a fall in the price of debt, which offset the interest payments provided by the bonds.

This is one of the clearest indications to date of how the emergence of a new strain of coronavirus has prompted global investors to move away from stocks and corporate bonds that are considered the most important. more vulnerable to the potential blow to the global economy caused by the new variant.

Sales last month were even more severe for the lowest rated segment of the market. Bonds of triple-C and lower-rated companies returned minus 1.4%, reflecting fears that a boom in venture capital funding could be thwarted by tighter monetary policy or tighter social restrictions in response to the new variant of the coronavirus.

Much of the slowdown came on Friday last week, as concerns over Omicron prompted governments to rush to reimpose restrictions in a bid to stem the spread of the infection. Leisure was the hardest hit in the debt market on Friday, with airline bonds suffering as well.

Yet investors had already become cautious earlier in November, as high inflation and decelerating economic growth heralded calls for the Federal Reserve to pull out of its $ 120 billion bond purchase program. per month during the pandemic faster than expected. Comments from Fed Chairman Jay Powell on Tuesday suggesting that the US central bank could speed up its exit from bond purchases added to this nervousness.

The additional yield over very low risk government bonds, or “spread”, for the high yield index fell 3.03 percentage points at the start of the month – slightly above its all-time low – to 3.67 percentage points on Tuesday, its highest level since March. Bond yields move in the opposite direction to their prices.

“We haven’t seen these levels for a while,” said Matt Eagan, portfolio manager at Loomis Sayles. “In the end, the buyer base was not as warm as it used to be.”

Another sign of the sour sentiment towards this asset class, investors pulled $ 2.8 billion from the high yield bond market last week, according to data from EPFR Global, the biggest pullback of a week since mid-March of this year, when inflation fears started to emerge. scare off investors.

Investors also pointed to the seasonal slowdown in Thanksgiving preparation, with traders looking to make profits and reduce risk before trading activity declines, as bankers and portfolio managers pause for trading. vacation.

Despite the sell-off, junk bond yields are still in line with levels from a year or so ago, signaling that borrowing costs will remain near historically low levels for many borrowers.

“It’s quite a change from a stable environment to a sharp decline, but it’s not like it’s a market panic,” said Marty Fridson, chief investment officer at Lehmann Livian Fridson. Advisors. “Without Omicron’s final blow, it wouldn’t have been so bad.”

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