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.