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U.S. high-yield corporate bond ETF falls to 8-month low after Powell announcement

FILE PHOTO: A packet of U.S. five-dollar bills is inspected at the Bureau of Engraving and Printing in Washington

By Karen Pierog

CHICAGO (Reuters) - Investors looked to shed some risk in the U.S. corporate bond market on Monday, pushing a fund tracking the high-yield sector to its lowest level since March after Jerome Powell's nomination for a second term as Federal Reserve chair raised expectations of sooner rate hikes.

The iShares iBoxx exchange-traded fund fell about 0.38% to an eight-month low of $86.22.

Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research in New York, said there was some shifting out of risk assets as U.S. Treasury yields rose with the two-year yield, which typically moves in step with interest rate expectations, topping 0.59%, its highest level since early March 2020.

"If the market is correct that the Fed is going to tighten a couple of times next year, then financial conditions are going to get tighter and some of the lower-quality companies in the high-yield market are going to have a tough time," Jones said.

"You tend to see risk reduction when you get into a rate- hike cycle or tightening cycle," she added.

With the end of 2021 looming, investors may also be cashing in gains.

Kenneth Monaghan, co-director of high yield at Amundi Asset Management US, said that after the sector's record issuance and generally good performance, "people want to close down shop in this particularly exhausting year."

"If I had to guess what will happen between now and the end of the year, it's going to be a sideways to maybe modestly weaker conversation," he said.

President Joe Biden nominated Powell for a second four-year term, positioning the former investment banker to continue the most consequential revamp of monetary policy since the 1970s and finish guiding the economy out of the pandemic crisis.

On Friday, high-yield spreads widened. After diving to 303 basis points on Nov. 8, the option-adjusted spread on the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, was at 324 basis points on Friday, its widest since Oct. 13.

(Reporting By Karen Pierog; Editing by Alden Bentley and David Gregorio)