High-yield corporate bonds sold off last week after USA manager Third Avenue said on December 10 it was suspending redemptions on its $788m (£521m) Focused Credit fund in order to liquidate the portfolio in an orderly manner. But this time, he said, the default rates might be revealing what’s already known: “We’ve had a recession in the oil patch”.
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Billionaire investor Carl Icahn told CNBC in a phone interview Friday: “The high-yield market is just a keg of dynamite that sooner or later will blow up”.
We’ll take a leap of faith here and assume that investors not living in caves have heard something about the chaos going on in the high-yield bond market.
The fund’s value has plunged from about $US2.5 billion to $US789 million, after bets on very low rated and unrated corporate debt turned sour. Securities experts said one high- yield fund’s decision essentially to stop redemptions is unlikely to have contagion effects because shareholders in such funds tend not to be reliant on their investments for regular payments, such as tuition or mortgage payments, as are investors in other kinds of mutual funds, like money funds.
Barse had been with Third Avenue for 24 years.
Blackrock’s iShares iBoxx $ High Yield Corporate high-yield ETF (NYSE Arca: HYG) fell 2 percent Friday. But redemptions came to US$3.3 billion in November, the most since June.
Usually, bond prices are less volatile than shares because debt holders have earlier claims to a firm’s assets in the event of a bankruptcy. He hired Barse in 1991 to oversee the firm’s operations.
More dramatically, the value of Third Avenue’s troubled fund had shrunk from $US2.5 billion to $US789 million before the firm shut the door on redemptions. With the International Energy Agency forecasting the supply surplus will last until late 2016, the oil bear market looks set to be longer, deeper and, therefore, far more costly than imagined, writes Heard on the Street columnist Spencer Jakab.
“The economy is supposed to be good, but the markets are highly suspect”, said Mr Gundlach, who for months has been arguing against a rate hike.
One clear message is that investors, managers and watchdogs should pay greater heed to mutual-fund liquidity risks. They acknowledged plenty of mom-and-pop investors will read the headlines and pull their money out of junk bond funds. There is some precedent for what happened at Third Avenue Focused Credit, though in the past the problems have been centered in the municipal-bond market.
Meanwhile, the Massachusetts Securities Division announced it has begun an investigation into the Third Avenue fund’s closure Monday, Secretary of the Commonwealth William F. Galvin’s office said in a statement.
“I think overall redemptions at some point are going to slow down across the market”, Lasry said.
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Falling energy prices have put extreme cashflow pressure on the U.S. oil and gas exploration, development, services and equipment companies that account for about 15 per cent of total high-yield issuance, and this is driving their debt’s risk premiums up and the market prices down. This tight spread characteristic is an indication of the rich valuation of the high yield asset class at that time.
