Sorry, Barron’s… The High Yield Bond Rout Is Just Beginning

Last week, Barron’s recommended that investors start buying beaten-up junk bond funds that are trading at big discounts and yielding 10% or more.

Their advice: “Take advantage of this rout in risky debt.”

Not so fast!

It is certainly true that a number of closed-end junk bond funds are trading at big discounts and also paying big dividends. Part of the reason for this is that the already weak market in junk bonds was spooked by the liquidation of the Third Avenue Focused Credit Fund, a junk bond mutual fund. (That was huge news. Here’s my take if you missed it.) This led to an even sharper sell-off in junk bonds that pushed the prices of the bonds themselves, as well as many closed-end funds that own them, to prices that may not reflect their intrinsic value.

But there’s a big problem with this Barron’s advice.

To continue reading click here.

Watch This Chart to Profit from the HY Credit Crash

Last week, the $789 million Third Avenue Focused Credit Fund took a highly unusual step for a mutual fund.

It announced that it would liquidate and would “gate” the fund, which means that investors would not be able to receive their money until the assets were sold at a later date. This move was necessitated by the fact that the fund (which is down 27% in 2015) owned many low quality and illiquid high yield bonds that it was unable to sell. In order to accomplish this, the fund sold its assets into a liquidating trust and deemed the sale a redemption from the fund that met its obligation to redeem shares without asking the Securities and Exchange Commission for prior approval to freeze withdrawals.

This is actually unprecedented.

Needless to say, this has upset investors and brought SEC examiners to its offices to figure out exactly what is going on. It has also freaked out investors in other high yield bond funds, leading to a huge selloff across the high yield bond market.

Matters were not helped when another $400 million high yield hedge fund managed by Stone Lion Capital Partners announced shortly thereafter that it was also gating its investors after receiving large redemption requests, and that another $900 million high yield hedge fund managed by Lucidus Capital Partners had already liquidated and was returning all of its investors’ capital.

Welcome to the downside of the Federal Reserve’s invitation for investors to reach for yield and greater risk!

The opportunity is going to be immense. But we’re not there yet.

Here’s the chart to watch.

To continue reading click here.

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