Is There Structural Risk to Junk Loans?

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July 10 (Bloomberg) -- Bloomberg’s Lisa Abramowicz reports on the risks of investing in junk loans. Triton Research Co-Founder and CEO Rett Wallace and Nuveen Asset Management Chief Equity Strategist Robert Doll also speak on “Bloomberg Surveillance.” (Source: Bloomberg)

If interest rates to rise more quickly than people expect, they offer a hedge.

They would ostensibly rise in tandem with rates.

You get a higher yield and you get that inherent hedge against rising rates.

It makes them really popular.

Is the idea that investors are sophisticated enough to understand those risks?

There is an incredible transformation in this market.

It has grown to be about $750 billion.

Mutual fund investors, individual investors, account for a greater proportion of this market than ever before really.

Last year, they funneled more than $60 billion into mutual funds to buy these loans.

Hyg would be the plain-vanilla example we all know about.

Hyg is junk bonds.

Junk loans and junk bonds are very different.

Bonds are securities, loans are not.

These are paper documents.

Lawyers have to look over every single line when they sign off on each trade.

This make each trade takes an average of more than a week to complete.

It might take you two weeks to get your money back.

If you have a mutual funds that is promising to pay investors on demand to want to redeem their money within 3-7 days, what happens if they try to liquidate the underlying assets and it takes an average of two weeks in good time to get the money back?

Bob, when he -- when you hear lisa talk, do you hear a voice going in your head, there is no return without risk?

[laughter] it sounds like mortgage-backed bonds that you cannot trade.

How do you make it even worse?

You can't sell it if it is going to go down.

If there are a lot of protections, you have short-term funding that is financing long-term assets that are hard to liquidate.

This is a problem that has not been tested.

Since 2011, they have returned 19%, even though there have been some withdrawals this year.

These are individual investors piling in or these insurers?

Is there a regulator here to oversee anything?

[laughter] these are largely unregulated.

They do not fall under securities laws.

A traditional bank loan, with a bank going out to a company come another the banks can syndicate the loans.

Can we just rename these, agreements between mutually consenting adults?

[laughter] are they?

People are going into mutual funds, but they can buy the shares like stock?

They act as though they are securities, but they're backed by -- it is a little like the apple consent agreement.

You sign it come but you have no idea what you are signing.

Please check here.

It is a further stretch of what happens in small cap stocks and international stocks.

You cannot sell an entire mutual fund today and get the financial value.

There have to be policies that are put in place and are hereto overseen by managers of mutual funds, portfolio managers themselves, and the board.

Never guaranteed.

It is not as if someone hasn't a mutual fund 100% invested.

It is a much lower percentage for the very risk.

There are some actions that fund managers do take to hedge against the chance of with drawl.

They hold bonds.

They alter the performance.

Money needs somewhere to go.

Fund managers have to put the money to work.

Maybe you can get a couple of points more return here then somewhere else.

Well put.

It is easy to buy, difficult to get out.

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


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