Junk bond funds in focus today
If you were to ask almost anyone what the biggest risk in global financial markets in the QE era, they would say the same thing: debt.
More specifically, the ability of low-grade borrows to take on massive debt at low rates. The Fed fuelled a cheap money bonanza and companies with poor cash flow took advantage.
That's exactly what all the critics of QE expected. That's why today's news is so scary.
Today a lesser-known mutual fund -- Third Avenue Management -- announced it was liquidating and returning funds in the Third Avenue Focused Credit Fund. It only manages $789M, which barely qualifies it to be a fund worth mentioning, but it's how they're liquidating that's got the market worried.
They've banned redemptions and said they need time to liquidate because of poor bond-market trading conditions.
So the question is: Is it the canary in the coal mine?
There are $305 billion in junk bond mutual funds. If you heard that funds were being locked up and saw negative returns this year (which junk bonds funds had), what would you do?
No one wants to be the last one out the door.
