While the turmoil in the commodity markets has been on everyone’s radar for the last year, the deterioration in the high yield bond market has been rumbling beneath the surface. However, on Friday it began to bubble over after Third Avenue Management, a New York investment firm founded in 1986, announced it was closing their Focused Credit Fund, which invested in high yield bonds, to subscriptions and redemptions. (See Shareholder letter) In other words, you can’t have your money back now!
The move sparked a sell off in the high yield bond market, reportedly the biggest week of outflows from high yield funds since August 2014. What spooked investors most was the fact this fund was a US open ended mutual fund, with daily liquidity. David Barse, Third Avenue CEO, has since been fed to the fishes. In charge since 1991, he is now ‘no longer left in the building’.
As well, Stone Lion Capital, a hedge fund founded by two ex-Bear Stearns traders, (the Co-Heads of the Bear Stearns Distressed Debt and High Yield Trading Group no less) has also suspended redemptions in its credit funds. Many investors will recall the failure of the Bear Stearns credit-focused hedge funds in 2007, an early warning sign they may have ignored. Perhaps those running for the exists don’t want to be left holding the bag again.
The lesson for investors is to understand illiquidity risk, something that is not always rewarded. See my blogs on this: Pricing an illiquidity premium in liquid assets and Government bonds signal liquidity warning
The slide in oil prices shows no signs of abating, with the price of Brent crude oil falling a further -12.91% last week, to $37.58 per barrel. The price is now hovering near the lows of 2009, down a stunning -67.78% since June of last year. There is no sign of a catalyst in sight for prices to move higher, other than a short squeeze on speculators. OPEC, the oil cartel, has refused to step in to stabilise prices; rather than cut production against a backdrop of lower demand and excess supply they continue to leave it to the free hand of the market to dictate prices. A more forceful OPEC hand may be needed!
I maintain my view from earlier in the year regarding the movement in oil prices, and it is also relevant as we monitor events in the high yield market:
“The macro impact of the oil price decline is debatable but moves of this magnitude over such a short time period in any financial asset can be inherently destabilising; one lesson from the last crisis is that market participants can underestimate the contagion effect from what is perceived as a relatively small part of the market, think sub-prime mortgages!” It should make for an interesting 2016!