By Patturaja Murugaboopathy

(Reuters) – U.S. high yield bond funds experienced their largest outflows for eight months in November. This was largely due to concerns about the Omicron coronavirus and the possibility of the Federal Reserve increasing interest rates earlier than anticipated.

Refinitiv Lipper data shows that the November outflow from U.S. high yield bond funds was $4.2 billion – its largest since March.

Fund flows into U.S. high yield bonds: https://fingfx.thomsonreuters.com/gfx/mkt/znpnexemqvl/Fund%20flows%20into%20U.S.%20high%20yield%20bonds.jpg

The ICE (NYSE 🙂 BofA U.S. High Yield Index is a benchmark used in the junk bond market. It fell 1% last month. This was the greatest drop since September 2020.

Index’s option-adjusted spread measures the amount of premium riskier businesses should pay in comparison to government payments. It was 308 basis point earlier.

ICE BofA FI Index: https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwowgrpo/ICE%20OofA%20FI%20Index.jpg

Ryan O’Malley of Sage Advisory Services is a Fixed Income Portfolio Strategist. Ryan said outflows were mainly due to concerns about the Omicron derivative’s impact on the Omicron version’s “reopening Trade” – particularly in the transport and energy sectors.

He stated that the flow of funds was also affected by “the prospect of an acceleration in quantitative easing tapering”

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

US high yield funds seeing big outflows in November: https://fingfx.thomsonreuters.com/gfx/mkt/zjpqkykgepx/US%20high%20yield%20funds%20seeing%20big%20outflows%20in%20November.jpg

Analysts also stated that investors are cutting back on high-yield bonds because they don’t want to take risks through the end of the year.

U.S. businesses have borrowed an unprecedented $406 billion in high-yield bonds this year. This has increased supply of junk bonds on the market.

US high yield bond issuance hits a record high this year: https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnlnykpq/US%20high%20yield%20bond%20issuance%20hits%20a%20record%20high%20this%20year.jpg

O’Malley said that “there is concern that new issues supply has outstripped demand, especially in the face of an less accommodative Fed.”

Analysts said that the uncertainty surrounding the Fed’s future rates and the low liquidity has also led to increased volatility on the bond market, leading to higher outflows of high-yield debt.

The ICE BofA MOVE indicator, which estimates one-month expected swings for U.S. bonds is at its highest trading 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’s also the least risky of the risk asset classes,” said Colin Robertson, head of fixed income at Northern Trust Asset Management.

With additional reporting by Gaurav D. in Bengaluru, Editing done by Vidya Ranganathan & Aditya Soni