Junk bonds lost their magic once again as interest rate volatility surged in anticipation of the Federal Reserve’s hawkish stance at the Jackson Hole meeting. Speculative-grade bonds fell for a sixth straight day on Tuesday, erasing about a third of a summer rally that peaked in mid-August, the Bloomberg High Yield Index showed.
Given the risk of a recession and uncertainty around the pace of central bank tightening, spreads may have become too tight, according to asset manager Aviva Investors. “If the rate hikes are longer or more aggressive, then any kind of rate volatility could mean a near-term stop flowing into the high-yield market,” said Sunita Kara, the firm’s asset manager. In a worst-case scenario, funds will even exit.”