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Wall Street's freaking out.
The market for high-yield bonds and the closure of the Third Avenue Focused Credit fund is, depending on who you ask, historic, scary, a keg of dynamite, full of land mines or likely to cascade into something bigger.
To recap, high-yield bonds (or those of riskier borrowers) have sold off sharply.
The declines began among bonds in the energy sector, as investors worried that tumbling oil prices would make it hard for borrowers to pay back their debt, but the concern has spread from there.
Then, last week, Third Avenue announced plans to liquidate its Focused Credit fund, and said it would freeze withdrawals because it is unable to exit positions quickly. That got other investors worried about their ability to get out of the market, creating even more selling pressure.
Now the market is tanking, and the high-yield market — a place many investors had put extra cash they looked for yield in a low-interest rate environment — is set for a historic year.
"2015 could become the worst non-recession year for HY," Goldman Sachs' Lotfi Karoui said in a note Monday. "HY returns have sunk to their lowest level on the year as the pressure from lower oil prices continues to constrain risk appetite."
It feels like everyone on Wall Street is now voicing concern.
Citigroup said on Friday that the bond market was littered with land mines.
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Societe Generale said in a note Monday that the Third Avenue decision to close its fund was "sending shivers through a market which still remembers the events of August 2007 when BNP froze withdrawals from three of its funds."
Scott Minerd, global chief investment officer at Guggenheim Partners, told Bloomberg that more high-yield funds will face investor redemptions.
"The risk is that this is going to cascade into something bigger," he said.
Ryan Wibberley, chief executive of CIC Wealth, echoed those sentiments when talking to The Wall Street Journal.
“I’m not normally a doom-and-gloom type of guy, but this is scary,” he said.
Carl Icahn said last week that the high-yield market "is just a keg of dynamite that sooner or later will blow up."
And then there is this from Bill Gross:
The background to this is that the high-yield market has boomed since the financial crisis. As the chart from UBS below shows, issuance in the US high-yield market has exploded since 2007. Investors have poured money into high-yield mutual funds and exchange-traded funds offering daily liquidity in an asset class that has become increasingly difficult to trade.