US junk bond funds post biggest outflows in 8 months in November



December 2 (Reuters) – U.S. high-yield bond funds posted their biggest outflows in eight months in November, largely due to the prospect of the Federal Reserve rising interest rates earlier than expected and, to some extent, concerns about the Omicron variant of the coronavirus.

According to data from Refinitiv Lipper, US high-yield bond funds faced an outflow of $ 4.2 billion in November, the largest since March.

The fund invests in US high yield bonds

The ICE BofA US High Yield Index (.MERH0A0), a commonly used benchmark for the junk bond market, fell 1% last month, the biggest drop since September 2020.

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The index’s option-corrected spread, which measures the premium riskier companies are expected to pay over what the government pays, widened to 367 basis points at the end of last month, from 308 basis points a month earlier.

ICE BofA FI index

Ryan O’Malley, fixed income portfolio strategist at Sage Advisory Services, said the main reasons for high yield bond exits were concerns over the “reopening of trade” of the Omicron variant, in particular for the energy and transport sectors.

“The prospect of an accelerated reduction in quantitative easing” has also affected flows, he said.

The iShares iBoxx $ High Yield Corporate Bond ETF led with outflows worth $ 1.35 billion, while BlackRock High Yield Bond Portfolio; Institutional and Fidelity Capital & Income funds reported net sales of $ 850 million and $ 406 million, respectively.

US high yield funds post strong outflows in November

Some analysts have also said investors are reducing their positions in high yield debt because they are unwilling to take risks until the end of the year.

U.S. companies have also borrowed a record $ 406 billion in high yield debt so far this year, which has increased the supply of junk bonds in the market.

US high yield bond issuance hits record high this year

“There is some concern that the supply of new issues will exceed demand, especially in the face of a less accommodating Fed,” O’Malley said.

Uncertainty surrounding the future path of the Fed’s rates and low liquidity has also increased volatility in bond markets, prompting larger outflows of high yield bonds, analysts said.

The ICE BofA MOVE index (.MOVE), which measures expected one-month fluctuations in US bonds, is trading at its highest level since March 2020.

“But it’s important to keep in mind that while high yield is the riskiest of the fixed income asset classes, it is also the least risky of the risky asset classes,” said Colin Robertson, Head of Fixed Income at Northern Trust Asset Management.

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With additional reporting by Gaurav Dogra in Bengaluru Editing by Vidya Ranganathan and Aditya Soni

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