Junk-Bond Debacle has Bond Fund Investors Feeling like it’s 2008 Again

The recent announcement that Third Avenue Focused Income Fund would undergo an orderly liquidation has investors on edge about junk bonds.
Fortunately, the Third Avenue fund, with its high-concentration in triple-C rated and unrated debt, was likely unique inthe dangers it presented to investors.
But in the wake of this junk-bond debacle, the market is repricing even higher-quality yield-producing securities, and this is hurting income-oriented mutual funds that are mandated to deliver yieldwherever they can find it – from bonds, stocks and other sources.
Problems not limited to junk bonds
The market is demanding more yield from even mildly risky assets, which entails reducing their price. If a security used to cost $100 and paid $2 (for a 2% yield), investors now may decide that such an instrument should yield 3%. In that case, they would drive the price down to $67.
Investors may reprice assets in this way for a number of reasons. For example, they may think U. S. Treasury yields are going up. That must send other securities’ yields up, and prices down, since yield-generating securities are judged against Treasurys.

This post was published at David Stockmans Contra Corner on December 29, 2015.

 

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