US Junk Bonds See Sharp Selloff as Omicron Variant Has Investors Worried
U.S. junk bonds took a dive in November as Omicron variant fears escalated concerns that lower-rated companies will struggle to pay off their debts.
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The decline represents the largest drop-off in junk bonds in more than a year — a high-yield bond index compiled by Ice Data Services dropped just over 1% in November. This marks only the second month in all of 2021 where the gauge has posted a negative total return — its worst showing since September of last year, per the Financial Times. The decline was driven by a slide in the price of the associated debt. The decline in the price of the debt in turn offset interest payments which the bonds provide.
The Financial Times reports that the decline is “one of the clearest indications yet of how the emergence of a new strain of coronavirus has prompted global investors to shift away from stocks and bonds of companies that are considered to be most vulnerable to the potential hit to the global economy caused by the new variant.”
The downturn came mostly last Friday, Nov. 26, along with a general downturn in the S&P, both of which coincided with the onset of Omicron variant news. Governments have been forced to reimpose restrictions, lockdowns, and travel restrictions in light of the variant, with the leisure sector taking the most damage in the debt market on Nov. 26.
Bonds of triple-C and lower-rated companies returned -1.4% at that time, suggesting that investors are officially pricing in the potential end of the bull market that has dominated for the better part of the last decade.
Lower-rated companies are issued “junk” status bonds as they are the riskiest asset class. Also called “high-yield” bonds, junk bonds are typically high-risk, high-reward — or no reward at all, being perceived as a bit of a gamble from an investment point of view.
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Investors are apparently now deciding it’s better to bow out rather than ride the wave — at least concerning certain junk bonds — and the selloff last Friday supports the anticipation of a downturn, along with apparent dumping of debt.
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