Junk Bonds Lead Markets Lower
The collapse of junk bonds reminds me of 1994-95 when Greenspan’s Fed raised interest rates. That led to many bankruptcies in the high yield bonds which plowed its way throughout the high yield space.
The Fed’s ZIRP monetary policies over the past 7 years have led to a boom for income seekers generally. On the buy menu were junk bonds which were sold to investors with “no worry” labels. We have warned here for over a year that a day of reckoning was at hand. The past year has seen a steady outflow of assets from funds focused on the space.
It shouldn’t surprise that Thursday the first public fund, Third Avenue Credit Mutual Fund, declared it would halt current redemptions of its high yield fund. The negative ripple effect through the space was immediate.
Junk bonds overall trade like high beta stocks. Risks are high no matter having funds spreading their risk over a number of issues. They all sell-off in the stampede to the exists.
Stocks overall sold-off heavily given high yield difficulties and declines in commodity markets once again. Only highly rated Treasury bonds escaped Friday’s selling fury. Along the way, gold and gold stocks were just a little higher on the session.
So, now pundits universally agree the Fed will be raising interest rates Wednesday a la Greenspan in 1994/95.
Perhaps given the onslaught of investor worries, they may buckle under the pressure. Even so, their moment to raise interest rates from their “emergency” levels passed years ago when the recession ended. So their mistake was staying too long with these policies to frankly please Wall Street. That cheap credit allowed for stock buyback financings along with M&A but few investments for long term growth.
Market sectors moving higher included: Volatility (VIX), Bonds (TLT), Gold (GLD) and Gold Stocks (GDX).
Market sectors moving lower included: Everything else with a ticker symbol.
Below is heat map from Finvix:
The top ETF daily market movers by percentage change in volume whether rising or falling is available daily.
Volume returned to extremely heavy and breadth per the WSJ was quite negative (nearly 10/90 relationship) and Money Flow was heavily weak.
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As I’ve been saying for some time, the markets are going through a topping process.
In any event, we await the Fed decision for Wednesday. They could raise interest rates slightly but perhaps add QE4 which is the current rumor.
No matter, they’ve stayed at zero for far too long and now contemplate raising interest rates as the economy weakens, or “not solid”.
It may be I won’t post again until Wednesday given current conditions.
Let’s see what happens.
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