(Bloomberg) - U.S. junk bonds have returned almost 2% in December, beating most other parts of the fixed income market and paving the way for borrowers to raise more debt fast out of the gates in 2022.
The risky debt has gained about 1.9% in December, the biggest monthly return in more than a year, according to Bloomberg index data, after experiencing one of the worst months since the pandemic started in November. U.S. investment-grade bonds have fared less well, down 0.16% over the same time.
Junk-bond yields, meanwhile, have rallied by more than 40 basis points in the past week or so and are on track to fall below 4%, levels not seen since September, if they keep dropping at this pace. A slow down in new bond sales has been one of the factors behind the rally, along with inflows to funds that buy the debt.
There hasn’t been a new issue since mid-December, and that limited activity is forcing investors that are looking to add risk to buy bonds in the secondary market, said Nichole Hammond, senior portfolio manager at Angel Oak Capital Advisors LLC.
Beyond “favorable technical trends” concerns about the omicron variant have also eased, she added. “Recent headlines regarding the virus variant and risk of associated lockdowns have been less severe than initially feared and led spreads to recover the widening in November,” Hammond said in a written statement.
As the new year approaches and the market prepares to reopen, Hammond says “we are back to where we were entering November,” with the backdrop being favorable in 2022 for high-yield bonds, which offer attractive valuations and lower duration compared to other risk assets.
“Current spreads already incorporate a large amount of positive news and we do expect pockets of volatility given how compressed spreads are,” Hammond said. “It’s difficult to see high-yield spreads move materially wider or tighter unless a specific catalyst emerges.”
U.S. leveraged finance markets are expecting junk-bond sales of about $30 billion in January, after just $8.8 billion were sold in December. Junk-bond issuance is expected to fall by about 10% to 15% in 2022.
By Augusta Saraiva
