Investors rush into junk bonds as corporate debt sees the biggest inflow in 3 years amid risk-on bets

• Bond traders are jumping into corporate debt on hopes of a Fed pivot, the Financial Times reported.
• Bond funds saw inflows of more than $16 billion in the month to November 20.
• Of that amount, junk bonds drew $11.4 billion in investment.

Risk-on investments are back in play, with corporate bonds seeing the biggest inflows since July 2020, the Financial Times reported.

In the month leading to November 20, corporate fixed-income funds pulled in over $16 billion, according to EPFR data cited by the FT.

Of that amount, junk bonds accounted for about $11.4 billion, with the remainder going towards investment-grade debt.

That comes amid rising optimism that the Federal Reserve has reached the end of its rate hiking cycle and may soon pivot to rate cuts. 

Spreads, or the added interest rate demanded for corporate debt over safe Treasury bonds, have fallen for both assets. The premium on junk bonds fell to 3.95 percentage points from 4.47 percentage points. For high-grade debt, the spread dipped to 1.17 percentage points from 1.3 percentage points.

The surge of inflows marks a big turnaround. Through this year to October, corporate bonds suffered over $18 billion in outflows, according to a Bank of America note.

And now, a majority of investors consider high-yield debt as the top contrarian trade for 2024, according to a Bloomberg survey from this month. In fact, junk bonds are seen as a more reliable investment than regional bank debt or commercial real estate loans.

However, traders are still wary of what type of junk bond they buy, with the lowest-grade assets still shunned, Reuters said.