By Karen Pierog

CHICAGO (Reuters). Despite fears over rising inflation and a newly discovered coronavirus threatening the U.S. corporate bond market, many believe that investors could be attracted to the fall by the possibility of higher yields.

According to Morningstar Direct data, November was the most difficult month since the beginning of the pandemic. High-yield bonds earned a negative 1.03% average return, which is the lowest rate since March 2020.

Spreads are indicators of yield premium investors desire to hold junk-rated bonds over more secure U.S. Treasuries. They have widened most significantly since the start of the COVID-19 pandemic.

Analysts said that the Fed Reserve was concerned about higher inflation and would have to adjust monetary policy sooner than anticipated. They also wanted to avoid comparatively risky assets due to concerns over Omicron.

John McClain (portfolio manager, Brandywine Global Investment Management) said that while most managers are enjoying healthy returns over the past year, it’s important to de-risk.

McClain stated that November’s weak showing may help the market over the next year due to the increased yields from falling prices, which could attract investors.

“We’re returning to yields that look as the beginning 2021, and spreads that seem reasonably attractive here,” said he. It sets up the asset class well for investors demand going into 2022.

In November, the option-adjusted spread yield spread for the ICE (NYSE) BofA U.S. High Yield Index increased 51 basis points, marking the largest monthly increase since March 2020.

Graphic: Junk Bond Spreads Widen, https://fingfx.thomsonreuters.com/gfx/ce/zjpqkykeypx/Pasted%20image%201638376953981.png On Tuesday, the spread was at its widest since February at 367 basis points.

Refinitiv Lipper data revealed that the funds saw the largest weekly outflow of money since March during the week ending Nov. 24. Investors pulled a net $3.3 trillion from this category.

Among the victims of last week’s Omicron-triggered rout was the iShares iBoxx High-Yield Corporate Bond exchange-traded fund, which sank to its lowest level since November 2020 in frenzied risk-off trading.

This is because inflation can reduce bonds’ interest payments over the long-term. BofA’s November survey to U.S. credit holders found that 73% listed inflation as their top concern. That’s up from 66% back in September. It’s also the highest percentage since 2012.

U.S. consumer price growth was accelerated by higher gasoline prices and increased food costs in October. It is the 31st largest annual gain since 1981.

Collin Martin, fixed-income strategist at Schwab Center for Financial Research said that supply chain bottlenecks and worries over them were another thing that could have affected junk-rated firms.

“Anything that can negatively impact your cash flows poses a risk,” he said.

Martin said that investors might have decided to secure profits after a successful year by locking in losses for three consecutive months in high-yield bond bonds.

The year-to-date annual returns of the ICE BofA High-Yield Index at 3.4% were more than for any other ICE indices which track investment-grade corporations as well municipal bonds according to ICE Data Services.

Martin stated that some investors suggested “let’s rush to the exits and leave now to find better opportunities to return in” because there had been very little upside to high yield before November even began.