So Friday was Capitulation Day with stocks, bonds and most commodities selling off on continued Global economic weakness.
But a dangerous backwater trading ghetto now called high-yield corporate bonds — formerly known as junk bonds — had the worst day of all.
A mutual fund called Third Avenue Management with $790M under management, specializing in junk debt “broke the buck,” meaning its assets were so impaired that the fund was not worth the value it owed its investors. Mutual funds hold roughly $255 billion in these risky assets, according to the latest numbers, that mark is down 16% from its high earlier this year
Two hedge funds with a similar focus also put up gates on its funds, meaning investors could not redeem or get their money out of the funds.
Once the trading realm of Michael Milken and his band of junketeers at Drexel Burnham Lambert, now it’s filled with legitimate investors chasing yields through exchange-traded funds and hedge funds.
After seven years of zero interest rates, junk bonds, recasted as high-yield, was now the place to pump up returns for investors.
The largest high-yield ETF, holding $15 billion in assets, dropped 2%, to close at $79.52, its lowest since July 2009. Friday’s trading volume of 53 million shares doubled a record set earlier in the week.
Warnings on these investments have been coming for the past 9 months, with no other than Carl Icahn ringing the alarm. He beat up BlackRock’s chairman and chief executive officer Larry Fink over this.
Icahn warned ETF investors that people selling these instruments will tell you these ETFs are liquid assets with a robust market. Fink a huge seller of junk ETFs said Icahn was foolish and didn’t know what he was talking about.
I defy an investor to find a buyer of these instruments on Monday morning for anything north of $o.25 on the dollar.
Like the collaterilized debt obligations and the asset-backed securities of 2007-2008, with these junk bonds when the tide goes out we will find many naked investors wading ashore, to paraphrase Warren Buffett.
I’ll know later today or tomorrow how big of a crash this is likely to cause, but suffice it to say there are conference calls and possible meetings happening in lower Manhattan to figure out what to do before Asian markets open Sunday night.
Oh and that Yellen rate hike later this week, look for that to be delayed “due to market conditions”.