Junk Bonds Set for Worst Month Since 2011

(Bloomberg) -- Pummeled by expectations of slower growth, outflows and dropping oil prices, junk bonds are poised for their worst returns in more than seven years.

High-yield bonds are returning -2.64 percent in December, on track for the worst month since September 2011. The asset class has lost 2.59 percent so far this year, set for the biggest loss since returns fell 4.47 percent in 2015, according to the Bloomberg Barclays High Yield Total Return Index.

Junk Bonds Set for Worst Month Since 2011

“Expectations around global growth are slowing, so fundamentally that impacts credit, most notably in lower rated credits.” said Joel Levington, director of credit research at Bloomberg Intelligence. “Secondly, you have large outflows of cash from ETFs, so technically, the sector has faced pressure as well. Lastly, the B tier is composed with a large amount of energy credits, so the drop in oil prices has an immediate impact there as well.”

Funds that invest in high-yield debt have seen massive outflows as investors have fled risk assets, yanking $11 billion from the funds over the past six weeks, according to Lipper.

As returns have remained negative, high-yield spreads have risen this month to the widest level since the summer of 2016, and yields this week hit the highest level in 32 months.

Most big banks see junk bonds having a better year in 2019. Return expectations for the coming year range from 0.5 percent on the bearish end to 6 percent to 7 percent on the bullish side.

©2018 Bloomberg L.P.