Canaries in the Coal Mine: Credit Market Collapse Warning!
- Canaries in the Coal Mine: Credit Market Collapse Warning!
by John Stepek, http://moneyweek.com/
If you were around during the financial crisis, you might remember that fund closures became one of the canaries in the coal mine. Various funds failed in the run-up to the crisis, as bad bets on risky assets went wrong and the economic backdrop became steadily less forgiving. Why am I reminding you of this? Because we’ve just seen the biggest mutual fund failure in the US since 2008…
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The first domino to topple?
Last week, Third Avenue Management shut down its $788m ‘Focused Credit Fund’ – a fund investing in corporate bonds. The fund’s value had dropped by 27% in 2015. The key problem, notes Robin Wigglesworth in the FT this morning, is that the fund had run out of money “to pay withdrawing investors without having to dump hard-to-trade bonds at fire-sale prices”.
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The fund, apparently, is unusual in offering investors the ability to withdraw their money at any time they want to, even while dealing in more obscure parts of the corporate bond market.
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So it could just be the inevitable victim of a flawed business model. If you invest in illiquid assets (ones that are hard to trade) but also allow people to take their money home whenever they like, then you’re just asking for trouble. You don’t need an actual crisis to materialise – you just need people to start getting worried that one might appear.
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However, it’s indicative of wider problems in the sector. “Junk bonds are heading for their first annual loss since the financial crisis”, says Wigglesworth. Hedge funds investing in the sector have lost 12.5% from the 2014 peak.
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read more.
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Date: Wed, 16 Dec 2015 02:07:26 +0000 To: rdr6@outlook.com