Investors began dumping high-yield or “junk” bonds in November when inflation continued strong and the U.S. Federal Reserve made clear its plan to raise interest rates next year (see “Junk Bond Slump,” 7 Dec 2021).
The selloff accelerated when the Omicron virus variant appeared.
During the last two weeks of November, investors took $6 billion from mutual and exchange-traded funds focused on the junk bond market, according to Refinitiv Lipper data, marking the market’s biggest drain since September 2020.
Prices of the risky bonds stabilized earlier this month, but investors have continued to extract their capital from funds buying the bonds, The Wall Street Journal reported.
This year’s “everything rally” that drove prices from cryptocurrencies to meme stocks to new highs also vaulted junk bonds, leaving them particularly vulnerable to signals of higher interest rates to come.
A Bloomberg junk-bond index has fallen 2.4 percent since November 9 but the dip preceded the U.S. labor department’s report that inflation struck a three-year high.
Energy companies such as PBF Holding and Transocean Ltd. have been among the hardest hit, with their bond prices falling more than 10 percent, according to MarketAxess.
When the Fed raises rates, junk-bond prices will fall because fewer buyers will want to shoulder their risk. In turn, high-risk bonds’ interest rates will rise to attract leery investors.
The recent slide in junk-bond prices could presage a downturn in stock values, analysts told the WSJ.
TREND FORECAST: Junk bonds were in trouble as soon as the Fed laid out a timetable for ending its bond-buying spree and raising interest rates.
Now that the Fed seems ready to end its bond purchases and raise rates even sooner, as we reported in “The Powell Push: For Better or Worse” (7 Dec 2021), junk bonds’ price slide will become steeper through the weeks ahead.
In any market correction, junk bond funds will be an early casualty and among the last segments of the market to recover.