The junk bond sell-off continued for the third day on Monday. Several major asset managers were also affected by the wide ranging sell-off. A section of investors said it was becoming difficult to offload their junk bond holdings immediately or at list prices. This sparked off fears that a market crisis is in the making for the end of the year.
Other market watchers said the bourses have attained a certain level of stability. Demand for bonds of higher quality remains the same. However, it was clear that lower rated funds have lost their luster. Asset management companies dealing with them are also bearing the brunt of these events.
Three Day Slide
While the decline for junk bonds began last Thursday, an abrupt closure of a high-profile junk bond mutual fund intensified the bearish sentiment last Friday. U.S. junk bonds registered their biggest decline since 2011 raising concerns that a six-year bull market for stocks is nearing its end. The Third Avenue Management LLC liquidated the $789 million Third Avenue Focused Credit Fund. As a result, investors were prevented from withdrawing money that they had invested in the fund.
Junk bonds continued their downward movement this Monday. The iShares iBoxx USD High Yield Corporate Bond exchange-traded fund, the largest junk-bond ETF, fell 0.9% on Monday after declining 2% last Friday, its worst drop since 2011.
High Yield Energy Bonds Drop
Bonds issued by energy companies have declined more over the last three days. Among the hardest hit is the likes of Chesapeake Energy Corp. CHK, whose stock declined 12.5% over this period. Meanwhile, debt issued by companies rated higher such as Microsoft MSFT dropped in keeping with the fall in prices of U.S. Treasuries.
Lower rated debt in oil has been threatened for some time now. The price of oil has declined to below the $40 level and has been falling for quite some time now. Investors are not concerned whether companies from the sector can generate profits that will help them service loans and remain in business regardless of their output level.
Meanwhile, the rout has been intensified by oversupply in the home turf. Projections of mild weather mean that energy demand for heating in the U.S. might be far lower than earlier estimated for this winter. Companies which had borrowed heavily when oil prices were rising to invest in the shale rush are now struggling to repay high levels of debt.
Asset Management Firms Suffer
Goldman Sachs GS has issued a warning to clients that asset management companies will feel the effect of the junk bond dip almost immediately. A low interest rate regime in the U.S. had led investors to flock to fixed income bonds offering high levels of yield between 2009 and 2012. Outstanding assets in high yield debt increased to nearly $1.2 trillion during this period.
But the slump in oil implies that investors are eager to offload such bonds. Meanwhile, opportunities of trading in such debt are limited, heightening fears that it will be difficult to pull out money as the withdrawals mount. Such concerns increased following Third Avenue Management’s announcement last week. Shares of BlackRock Inc. BLK declined nearly 1% on Monday. The world’s largest money manager has a high level of exposure to junk bonds, though most market watchers believe this decline is a good opportunity to pick up cheaper shares.
5 Big Losers
Among the small and mid cap energy companies, Dynegy Inc. DYN, Oasis Petroleum Inc. OAS and Consol Energy CNX lost a respective 9.2%, 4.5% and 3.8% on Monday. Over the last three trading days, Dynegy, Oasis Petroleum and Consol Energy lost 14.2% 10.1% and 11.6%, respectively.
Asset managers such as Waddell & Reed Financial, Inc. WDR and Affiliated Managers Group, Inc. AMG lost 7.5% and 5.7% respectively on Monday. Over the last three trading days, Waddell & Reed lost 12.2% while Affiliated Managers ended up losing 13.2%.
Contagion Unlikely to Spread?
Several market watchers, including BlackRock believe that the slump which has hit junk bonds is unlikely to affect the broader markets in the days ahead. They think the slide is merely indicative of the slump in the energy sector that should taper off in the days ahead.
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