Last week we saw shades of 2007 with both a hedge fund and junk bond mutual fund halting the ability of investors to withdraw funds. An additional credit hedge fund announced it is shutting down. The problem this time around is a dearth of liquidity (read buyers’ strike) for junk bonds. In 2007 the problem was subprime mortgage backed securities and related derivatives.
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Suddenly last week, complacent investors in mutual funds, Exchange Traded Funds (ETFs) and hedge funds invested in junk bonds awakened to the Will Rogers’ wisdom that: “I’m not as concerned about the return on my money as I am the return of my money.” There is now a stampede for the exits – and in some cases, no exit ramp.
The Third Avenue Focused Credit Fund, a mutual fund which is supposed to be able to meet daily redemption requests, announced late last week that it is freezing withdrawals of investor money until it is able to liquidate its $788.5 million in corporate debt and junk bonds (also known as “high yield” bonds). Reuters reports that “Third Avenue’s fund had nearly half its assets in below ‘B’ rated debt, compared to the peer average of just 12 percent, according to Morningstar Inc data.”
In addition, a hedge fund, Stone Lion Capital Partners, said last week that it is suspending withdrawals of investors’ money from its $400 million credit portfolio.
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The question on everyone’s mind this week is if the junk bond market could trigger the kind of systemic contagion that unraveled the financial system in 2008. One major concern is just how large the perpetually blindfolded regulators have allowed this market to grow. Moody’s, the ratings agency, puts the high yield bond market at $1.8 trillion today, versus the $994 billion it represented at the end of 2008.
If it happens between now and the election, it will almost certainly put a Republican in the White House, a Republican sure to pursue policies that will not only make things worse, but will guarantee a repeat. The only bright side, and it’s fairly dim, is that the Democrats would likely be called back in 2020 to clean up the mess, which, if they are still controlled by Wall Street, they will promptly proceed to do as effectively as they did in 2009.
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