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US High Yield Debt hit by Fed’s Tapering

Junk bonds have been one of the most popular fixed-income investments in the past couple of years as the Fed’s three rounds of quantitative easing have pushed benchmark interest rates to rock bottom.  Now, as the Fed’s tapering began, it is no longer the case.  Investors favoured funds that invest in corporate bonds with higher credit quality and US Treasury securities.

The reversal in sentiment for US junk debt comes after the Federal Reserve reiterated last week the plan to slow its bond-purchase programme by $10bn each month.

According to Lipper, investors had pulled a further $972 million from those funds and ETFs that invest on junk bonds in the week ending February 5, bringing total withdrawals to $1.4 bn this year.

Average yields on the debt, which move inversely to prices, fell to record lows below 5 per cent in 2013. But they have since rebounded to trade at 5.65 per cent on Friday, according to Barclays.

After outperforming gains in other fixed income securities in the past couple of years, total returns on the debt stand at 0.8 per cent this year, according to Barclays.

That compares with gains of 1.7 per cent for investment grade bonds and 1.3 per cent for US Treasuries.

Reference

Financial Times, Vivianne Rodrigues, 2014-02-10, “Taper Time-bomb Hits US High-Yield Debt”