Worst January Ever for Junk Bonds Shows Fed’s Surprise Impact

U.S. junk bonds just posted their worst start to a year ever, and their dour performance last month made them a potentially surprising victim of the Federal Reserve’s looming rate-hike campaign.

The Bloomberg U.S. Corporate High Yield Bond Index lost 2.73% last month on a total return basis, the biggest January decline on record and the worst month of any kind since the pandemic rocked markets in March 2020.

Junk bonds are considered less sensitive to tighter central bank policy than investment-grade debt. And, to be sure, junk did have a better January than the 3.37% plunge experienced by U.S. high-grade debt. But that’s little comfort to high-yield investors now eyeing substantial portfolio losses.

The highest-quality part of the junk-bond market, BB rated debt, bore the brunt by falling 3.29%. Among sectors, food and beverage saw the steepest loss at negative 4.18%, according to data compiled by Bloomberg.

For some money managers, this is an opportunity to scoop up what they see as relatively safe bonds at a discount -- a view that hinges in part on believing uncertainty about the Fed’s policy path is largely over. That might be a stretch, especially as traders consider the possibility the first hike could be 50 basis points instead of the usual 25.