Music before the lights go out, a sign to sell your positions...

Music before the lights go out, a sign to sell your positions in junk bonds…

sell junk bounds

A couple of days ago we were told by the financial sector that two big funds investing in junk bonds had taken the decision to apply a playpen to investors…well, today brings news Lucidus Capital Partners, today’s announcement said they have completely liquidated its entire portfolio of high yield bonds and will return the $ 900 million invested by shareholders.

The Lucidus have been ready for the class, when in October, the storm that could come in the junk bond market and decided to start liquidating all positions were anticipated when one of its major shareholders announced they wanted withdraw money from the fund something they interpreted as music before the lights go out.

Do you remember which was the first visible sign that the financial crisis began in 2007?

In July 2007, when apparently all was going well, two funds; the Bear Stearns High-Grade Structured Credit Fund and High-Grade Structured Credit Enhanced Leveraged Fund both strongly linked to subprime securitizations announced that its shareholders applied to a playpen (restriction of the access to the liquidity) due to the lack of liquidity in the market to value their assets. These funds are massive, their moves in the market are felt by almost all investors.

We have been warned for many weeks that something was not good in the market of junk bonds. On Thursday we had further notices. These are quite significant. Third Avenue Management Funds, announced that it was appropriate to apply a playpen to shareholders who had invested in their Third Avenue’s Focused Credit Fund and investing in high-yield or high-risk bond. From Third Avenue they have so far justified:

“The general reduction of liquidity in fixed income markets makes it impossible for the fund to sell assets to generate liquidity to cover outgoing requests of their customers.”

The temporary closure of the bottom of Third Avenue, was a new twist for the junk bond market in bonds whose rating tranche CCC are already paying higher returns to 17% when it is not even a year and a half did not exceed 8%.

Today we have another fund of junk bonds that is taking the same decision as may be just a waterfall effect as investors in these assets be nervous and liquidity disappears. The Management Stone Lion Capital Partners announced that suspends withdrawals on your investment in high-risk bonds having a size of $ 400 million to see how more and more investors are seeking to withdraw their money and putting further pressure on sales in the market junk bonds which can lead to a real rout. Not long ago Jeffrey Gundlach was the warning that many High Yield funds would end up insolvent because they were not properly accounting for the value of their assets. On the seriousness of the current junk bond market is something that I have been warning for some time.