Mutual fund implodes, blocks investors from their money

Another potential outcome of the brewing junk bond market crash could be a wave of bankruptcies in the now hot areas of the U.S. economy like shale oil small caps, metals producers and select financial services.

Others pegged the continuous slide in the price of crude oil as the major underlying factor for the fund’s troubles. He was the public face of the firm’s announcement Thursday that it was closing its six-year-old, $789 millionThird Avenue Focused Credit Fund and would bottle up investors’ money for months or more as it tries to liquidate its assets. For one result of a hike in rates will be increased stress in the bond market.

Boockvar believes the Fed’s years of easy monetary policy ultimately fostered the scenario, saying: “Zero interest rates created an enormous demand for yield, and people put aside the potential risk to just focus on reward, and that always ends badly”.

The news comes after the collapse of the company’s junk bond fund last week, which jolted Wall Street and renewed worries about the difficulty of trading securities on the US bond market.

“The meltdown in High Yield is just beginning”, Icahn twitted on Friday. All 30 large high-yield bond funds tracked by Morningstar had losses this year, reflecting risk in this market. That’s one of the highest percentages of exposure in the junk bond sector. More companies have defaulted on their debt this year than at any point since late 2009, according to Standard & Poor’s.

Another eyebrow-raising event this week: Freeport-McMoRan (FCX), the world’s largest publicly traded copper producer, said it would suspend its common stock dividend to save about $240 million a year. Freeport’s $2 bln worth of bonds expiring in 2022 dropped 0.025 cents to 0.58 cents per dollar, according to data by the Financial Industry Regulatory Authority.

Bond prices and bond yields are inversely related. Another miner, Anglo American Capital Plc has found itself in a similar situation with its $650 mln worth of bonds. However, exchange traded funds that track speculative-grade debt are not exposed to the same level of risks.

“Right now we are at a critical juncture, and we will be watching it to see which way it goes”, Paul Karos of the Minneapolis-based Whitebox Advisors LLC said. “But the fund holds a lot of highly speculative bonds that are illiquid, and so it is a challenge to sell them”. The hot junk bond market greatly contributed to the shale oil boom in North America, and while the returns were positive, the entire market flourished.

The MSCI Emerging Markets share index lost 2.2 per cent last week, to fall to its weakest level since August, as investors dumped the shares and currencies of commodity exporters South Africa, Brazil and Indonesia. 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.

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