Junk bonds are heading for worst month since 2022 after punishing global selloff

By Christine Idzelis

High-yield bonds are having their worst month since 2022, when inflation was soaring

Popular bond ETFs have been pummeled in September by rising rates.

U.S. junk bonds are heading for their biggest monthly on-paper loss since 2022, after a spike in global bond yields weighed on fixed-income assets trading around the world.

A September spike in Treasury yields, which were edging higher Tuesday after climbing at the long end to the highest levels in decades, has sent bond prices lower in a broad and punishing selloff. In the U.S., both high-yield "junk" bonds and their investment-grade peers have been heavily impacted.

Junk bonds compensate investors with higher yields, because the companies that issue them are generally riskier than investment-grade borrowers, with their heavy debt burdens relative to their cash flows making them more vulnerable to default in an economic recession.

The U.S. economy has appeared solid, with its recent signs of continued expansion supporting junk bonds. Still, popular exchange-traded funds that broadly track junk-rated corporate bonds in the U.S. have lost a total of more than 2% this month through Monday, on course for their biggest monthly loss since 2022, when the Federal Reserve was aggressively hiking interest rates to battle surging inflation.

Although inflation is down significantly from its 2022 peak, it has remained stuck above the Fed's 2% target, a concern that this month prompted the central bank to raise its policy rate for the first time since 2023. Traders anticipate that the Fed isn't done hiking rates, sending the 2-year Treasury yield BX:TMUBMUSD02Y to multiyear highs while the longer-duration 10-year Treasury rate has climbed to its highest level since 2007.

The big question for investors is how much higher rates may go, as at some point, increasingly higher borrowing costs will become harder to handle for riskier areas of the market like junk bonds, Rebecca Venter, senior fixed-income client portfolio manager at Vanguard, said in an interview.

To be sure, the recent rate volatility has hit the U.S. investment-grade fixed-income market, which includes Treasurys, mortgage securities and corporate debt, about as hard as junk bonds this month.

The Vanguard Total Bond Market ETF BND, a large fund that broadly tracks the investment-grade fixed-income market in the U.S., was down 2.4% in September on a total return basis through Monday. That's similar to drops in September for both the iShares iBoxx $ High Yield Corporate Bond ETF HYG and State Street SPDR Bloomberg High Yield Bond ETF JNK, although junk bonds are handily outperforming year to date.

Both junk-bond ETFs ended Monday clinging to slight 2026 gains on a total return basis, partly due to the higher compensation investors get for taking more risk in junk bonds. In contrast, the Vanguard Total Bond Market ETF finished the session with a total loss of 2.5% so far this year after being beaten down in September, according to FactSet data.

"The move in rates is really what's driving returns, primarily" within fixed income, with investors pushing bond rates higher as the expanding economy keeps upward pressure on inflation, according to Venter. There's also the risk that elevated oil prices (CL00) in the U.S.-Iran war will fuel broader inflation, she said. Venter pointed to rising Treasury yields Monday partly reflecting that worry, as traders anticipate more rate hikes from the Fed.

Treasury yields moved higher after President Donald Trump reportedly rejected on Saturday Iran's proposal to reopen the Strait of Hormuz. The Associated Press reported the reopening had been contingent on the U.S. meeting certain conditions, including lifting its naval blockade of Iranian ports, waiving sanctions on Iran's sale of oil and observing a ceasefire that included Lebanon.

Long-duration pain

Junk bonds tend to have a shorter duration compared with funds tracking the broad investment-grade market, which to some extent has played in their favor this year, as long-duration Treasurys have been highly volatile.

For example, the iShares 20+ Year Treasury Bond ETF TLT has seen a total loss this year of 7% through Monday. That included a September drop of 4.4% on a total return basis, a significant loss that had it on track for its worst month since its recent 4.5% slump in July, FactSet data showed.

Although the Vanguard Total Bond Market ETF has been hurt by its exposure to long-term Treasurys, its broad portfolio had an intermediate duration of 5.7 years on average at the end of August, according to data on the firm's website. The ETF's slide so far in September had it heading for its biggest monthly fall on a total return basis since October 2024, according to FactSet data.

For now, wealth-management firm Glenmede is remaining patient in the face of the recent bond-market volatility, Mike Reynolds, the firm's vice president of investment strategy, said in a phone interview. Within the U.S. junk-bond universe, he said he prefers higher-quality assets, while the selloff in safer Treasurys has him eyeing opportunities to extend duration into longer-term government debt.

The yield on the 10-year Treasury bond BX:TMUBMUSD10Y settled Monday at 5.241%, the highest level since June 12, 2007, according to Dow Jones Market Data. Bond yields and prices move in opposite directions.

"We've been circling 5.5% on the 10-year as a time when we're probably going to get more interested in this," Reynolds said. "We're getting there a little more quickly than we thought."

-Christine Idzelis

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09-29-26 1000ET