Tokyo, Japan-headquartered securities broker, Osprey Associates has warned investors that the closure of a $760 million mutual fund that invested in high-yield debt could be the first ‘canary-in-the-coalmine’ to usher in a new credit crunch8 years after the one which preceded the great financial crisis of 2008.
Respected fund manager, Third Avenue Management shuttered its Focused Credit Fund after a slew of redemptions by worried investors meant that further withdrawals would have forced it to sell assets at prices that would have “unfairly disadvantaged the remaining shareholders”.
James Conroy, chief economist at Osprey Associates said, “Right now, this seems to be an isolated incident but stresses in the high-yield bond market have been apparent for some time now.”
High-yield or “junk” bonds became highly popular with institutional investors searching for yield in a market where interest rates were at near-zero. Many junk bonds were issued by energy companies to fund the shale oil boom but the collapse in oil prices since 2014 has decimated their ability to meet their servicing obligations leading many to simply file for bankruptcy.
“The failures will only get worse now that oil in trading as below $35. Billions of dollars’ worth of these bonds are on the balance sheets of institutional investors like pension funds an insurers but they are not as widely-owned as subprime debt was so, hopefully, they pose no systemic. That said, everyone thought subprime was contained and look at the way that ended,” said Conroy.
Osprey Associates warns that should it become apparent that the problem is far more widespread, a new credit crunch could ensue.
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