Hedge Funds Amass Most Junk Since '08 Crisis

REPLAY VIDEO
Your next video will start in
Pause
  • Info

  • Comments

  • VIDEO TEXT

Oct. 7 (Bloomberg) -- Bob Rice, general managing partner with Tangent Capital Partners LLC, discusses the concerns raised by hedge funds amassing junk shares with Deirdre Bolton on Bloomberg Television's "Money Moves." (Source: Bloomberg)

First of all, i want to hit the data point.

The biggest exposure to the junk bond market since 2008. these bonds are holding 28% of the junk bond market right now.

The reason that people have act up when they heard that is because a lot of those positions have themselves been purchased with leverage.

The leverage thing is working here and it is making people nervous.

In the past this has not played out so well.

In 2008 it did not play out well at all.

There were some concerns that this was overblown.

One of the things you have to remember is that hedge funds have hedged.

We were talking about that.

You were with your previous guest.

One of the primary functions of the high-yield bond market is because of the higher rates that those bonds have, they actually react less to movements in the interest rate market.

Now, you brought a chart that allows us to look at this with clarity, i hope we can pull that up.

It is performance of junk bonds to treasuries.

Of reasonably similar duration, which is the key, what you will see here at the zero line is that over the past year the junk bonds have been pretty much even stephen.

You have the yields that have not lost much principle.

There are barely any.

On the other hand, treasuries have reacted much less well to the overall increase in interest rates.

What you are seeing there is junk bonds having inherent hedging against interest rate risk to some extent.

All right, what about the idea of inherent credit risk?

Well, they are called junk for a reason, that is an extremely good question.

The answer again there is that these generally low interest rates take the stress from these companies, so the low interest rates overall help because they help these companies operate.

Secondly, cbs, we are talking hedge funds.

You can hedge out credit risk, which is where the credit default swaps were meant to do.

A huge market that hopefully the centrist holding these positions have hedged out.

Worried?

Worried.

You have to be worried, because you are starting to see things happen in the credit markets that have to make you nervous.

The rise of bonds where the holders get bonds instead of

This text has been automatically generated. It may not be 100% accurate.

Advertisement

BTV Channel Finder

Channel_finder_loader

ZIP is required for U.S. locations

Bloomberg Television in   change