Junk Bond Rout: It Begins Now in Earnest

Looks like the accelerating junk bond route may be as bad as forecast. Not that most investors would know what was forecast, since all references to the potential severity of junk bond illiquidity have been assiduously suppressed - until now.

A firm founded by legendary vulture investor Martin Whitman is barring investor withdrawals while it liquidates its high-yield bond fund, an unusual move that highlights the severity of the monthslong junk-bond plunge that has swept Wall Street.

Before retiring in 2012 from active management of his Third Avenue Value Fund, Marty Whitman built a stellar reputation as a value investor. His quarterly letters were read not only by clients of his Fund, but by other investment professionals. The firm he founded offered other investment funds, including this high-yield fund. The consequences of a fund offered by one of Wall Street's reputable firms refusing to redeem shares will impact not only the fund's shareholders, but also the entire mutual fund industry.

Third Avenue said poor bond-market trading conditions made it almost impossible to raise sufficient cash to meet redemption demands from investors without resorting to fire sales of assets.

Securities attorneys said Third Avenue’s decision to wind down the mutual fund without giving investors all their cash back could have significant repercussions for both the company and the mutual-fund industry, which for decades has thrived by promising to allow investors to take a long-term view of the markets while retaining the right to cash out shares at any time.

When CCC-rated bond yields spiked to 16%, as the rest of the junk bond universe remained at 6% yields, a shot was fired across the bow of all junk bond investments. Desperate attempts were made to peg the problem as one involving only energy firms, specifically those involved in the oil industry. As we've seen so many times in the past when a segment of the markets signaled trouble ahead, the claim was made that the problem would be contained to that segment of the junk bond universe. Any talk of a spreading contagion was pooh-poohed. Few heeded the warning.

But even before the spike in CCC rates, the issue of worsening bond market liquidity began to unfold - although, again, the powers that be did all they could to downplay the problem.

Regulators broadly have downplayed investor concerns about investors’ difficulties of buying and selling bonds at stated prices.

With Wall Street firms and their regulators doing all they could to distract investors' attention from the deteriorating junk bond market, trumpeting the rallies and ignoring the plunges, the trap was set. It looks now like the first of this trap's victims - shareholders of this junk bond fund - have been caught. And even now, we find regulators prefer to continue the charade that all is well.

...the Federal Reserve Bank of New York has been monitoring conditions in the credit markets. “Some liquidity measures look as good as they have always been,” said a New York Fed official in an interview, but the official said they had “seen some deterioration.”

 You can read more about what can only be categorized as stunning news from the junk bond market by clicking HERE.

LATE UPDATE: We caught this story last night in the Wall Street Journals online addition, front page. Strangely (?) this morning, the story is nowhere to be found. Could this news represent more than certain interests want revealed to the investing public?