Marc Lasry Supports Avenue Capital Junk Bond Fund As Worries Soar

“Furthermore, the other concern we have had for a while is some sort of contagion to European credit as credit in emerging markets and USA credit have continued to come under pressure”. In the course of the week, investors removed $3.8 billion from junk bond funds. Usually, it’s not so easy for lower grade corporates to issue bonds and raise debt.

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”.

During the recovery from the financial crisis, investors seeking yields higher than U.S. Treasuries bought risky junk bonds, or junk bond funds not realizing the risk of widening spreads versus the U.S. Treasury yield curve or default. While Icahn credits the Fed with getting us out of the most recent crisis by using these policy tools, he also argues that it was the Fed that got us into that crisis to begin with. The clothing manufacturer and the software maker among the many companies that issued debt, payable in more debt, earmarked to reward managers who’d already loaded them up with debt.

While a lot of money has gone into energy development which now looks highly doubtful, those were investments which seemed reasonable at the time.

And conditions today are nowhere near as bad as they were back then, when Lehman Brothers had gone belly up, and AIG, Fannie Mae and the whole world financial system were on the brink. Fitch ratings is anticipating that defaults will reach 4.5% in 2016, which will equate to $66 billion and will be the fourth highest default rate since 2000.

Much of the problem is down to stress in the energy sector. The battered energy and metals/mining sectors comprise 78% of the total bid below 50 cents.

In the last two weeks two specialist high yield funds have been frozen or placed into liquidation due to high redemptions.

The Third Avenue Focused Credit Fund in many instances had purchased 10 per cent or more of smaller bond offerings. What Happened? According to Third Avenue, the decision to liquidate the fund was driven by investor redemptions, which have accelerated as the fund’s losses mounted. Not only will interest rates rise, but repayment costs in local currency terms will also go up as the dollar strengthens.

“The question is whether funds like this are as liquid as investors had thought”, said Erik Gordon, a University of MI law professor. “But we don’t invest in high yield and we are generally negative on oil stocks and the broader commodity space”.

The fund, apparently, is unusual in offering investors the ability to withdraw their money at any time they want to, even while dealing in more obscure parts of the corporate bond market. Funds run by Third Avenue Management and Stone Lion Capital Partners have stopped returning cash to investors, after clients sought to pull too much money.

He adds: “Meanwhile, the disarray at the recent OPEC summit highlights the likelihood of the “lower for longer” theme that haunts energy and mining prices, and which is a disrupting force in the global economy and financial markets”. Already-low oil prices slid further this month as the Organization of Petroleum Exporting Countries (OPEC) failed to address a growing supply glut.

“It’s going to affect the entire market”, said Jim Kochan, chief fixed-income strategist at Wells Fargo Advantage Funds. The average yield on high-grade corporate debt at the time was about 2.6 percent. The market – by Goldman’s account – has priced in an 81% chance of the Federal Reserve raising rates in the U.S. on Wednesday.