Third Avenue Ripples Hit Credit Across Globe as Risk Rises

Massachusetts Opens Probe of Third Avenue Fund Closure
  • U.S. credit-default swaps rise to the highest in three years
  • Lucidus liquidates $900 million credit fund, plans to shut

Measures of bond risk surged worldwide amid concern that investors may face more losses in the roiling debt markets after Third Avenue Management froze redemptions from a high-yield fund and London-based Lucidus Capital Partners liquidated its entire portfolio.

Credit-default swaps that are used to insure against losses on junk bonds rose in the U.S. and Europe, with the risk premium on the Markit CDX North American High Yield Index rising to the highest level since November 2012 and the Markit iTraxx Europe Crossover Index that tracks speculative-grade debt in Europe climbing for a fifth day. BlackRock’s iShares iBoxx High Yield Corporate Bond ETF, the largest fund of its kind, dropped as much as 1.7 percent to the lowest levels since 2009.

“The market is in a tantrum,” said Tom Voorhees, a corporate-bond trader at Brean Capital LLC in New York. “There are a lot of investors taking time to look under the hoods and kicking the tires of funds to see what may or may not be next. The reality is people like to sell when things are going down.”

Lucidus Fund

Lucidus Capital Partners, a high-yield credit fund, said on Monday it would return the $900 million it has under management to investors next month. That comes after Third Avenue last week said it was shutting a $788 million credit mutual fund and delaying distribution of investor cash to avoid bigger losses, fueling the biggest one-day selloff in U.S. junk-bond markets since August 2011.

As the declines intensified on Friday, hedge fund Stone Lion Capital Partners also suspended redemptions.

“The most at risk are those investors who have expected high liquidity and have chosen to invest in illiquid instruments,” said Richard Salditt, a Bloomberg Intelligence analyst.

Investors including Jeffrey Gundlach, Carl Icahn and Bill Gross have warned there could be worse to come for high-yield debt. Icahn said on Twitter that “the meltdown in High Yield is just beginning.” Scott Minerd, global chief investment officer at Guggenheim Partners, predicts 10 percent to 15 percent of junk bond funds may face high withdrawals as more investors worry about getting their money back.

Some investors see opportunities in lower-rated debt following the recent declines.

‘Attractively Priced’

“I haven’t seen the high-yield market this attractively priced since December 2008,” said Dan Fuss, vice chairman of Loomis Sayles & Co. “You’ve just been run over by a bus and there’s another one coming but the good news is, they aren’t tanks.”

The average yield on junk bonds globally jumped 53 basis points this month to a more than three-year high of 8.43 percent at the end of last week, according to a Bank of America Merrill Lynch index. That’s up from a record low of 5.64 percent in June 2014, the data show.

Investors have lost an average 2.4 percent from high-yield bonds worldwide this month, according to Bank of America Merrill Lynch index data. The securities have lost 1.9 percent since the start of the year, compared with returns of 2.5 percent in all of 2014, the data show.

‘Negative Momentum’

“It’s hard to see the negative momentum turning around before the end of the year,” said David Ennett, Edinburgh-based head of European high yield at Standard Life Investments, which manages about 250 billion pounds ($378 billion). “Investors need to make sure they like what they own so they can stomach price volatility.”

Measures of risk in the Asia-Pacific region also rose Monday. The Markit iTraxx Asia index of credit-default swaps on corporate and sovereign debt, rose 2 basis points to 146 basis points as of 2:17 p.m. in Hong Kong, Westpac Banking Corp. prices show. That’s set for the highest close since Oct. 8, according to data provider CMA.

“What started off being a bad situation in the energy segment is now spreading and risking a very nasty end of the year,” said Mark Wade, the London-based head of industrials research at Rogge Global Partners Plc, which manages more than $50 billion. “There have been a lot of tourist buyers in the high-yield market. They try to get out on signs of weakness. As soon as you mention that funds are gated, it brings back nasty memories from 2008 and 2009.”