Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Sinkholes are popping up in the credit market.

Specific junk bonds are simply plummeting in value on little trading. For example, nothing all that obvious triggered a plunge in Syniverse Holdings, whose bonds fell to 39 cents on the dollar Monday, from 84.25 cents less than a month earlier. Debt of Intelsat, United States Steel, SandRidge Energy and Ultra Petroleum all lost about 30 percent last month.

Sharp Drop-Off
Prices on $475 million of Syniverse Holdings bonds have plunged.
Source: Finra's Trace bond-pricing data, Bloomberg

Yet looking broadly, there isn’t a financial crisis in developed markets. U.S. stocks are still eking out gains. Companies are still issuing bonds.

So why the precipitous drops without warning?

The explanation is that asset managers are being forced to exit their riskiest positions, either because of withdrawals or to placate increasingly nervous investors, and they’re finding no buyers on the other side. When these fund managers finally get an offer to shed their unwanted holdings, they’re just taking it, even if it means taking a huge loss.

At a certain point, big hedge funds might be expected step in to buy with yields soaring past 20 percent on average for distressed U.S. bonds. These funds were supposed to be the buyer of last resort now that big bank trading desks have less capital to deploy opportunistically. 

Punctured Prices
The lowest-rated bonds have been slumping.
Source: BofA Merrill Lynch CCC & Lower US High Yield Index

But some hedge funds may instead be fueling the pain at this point. 

Strategies focused on distressed assets and restructurings lost 5.4 percent on average in the three months ended Sept. 30, according to Chicago-based Hedge Fund Research. Funds often have certain redemption notice periods of one to three months, meaning that managers would have until the end of the year to liquidate some holdings in the face of withdrawals announced at the end of that quarter.

Hedge funds in general posted their weakest third-quarter inflows in six years, and these funds are poised to have outflows in the fourth quarter, according to Katherine Burton and Saijel Kishan of Bloomberg News.

So many funds just aren’t in a position to jump on potential opportunities, even if prices are starting to look almost silly in some cases. And those with cash on hand aren’t pouncing on low-price bonds just yet because they are waiting for a deeper bottom.

More than likely some of these troubled bonds are going to rebound, providing big gains to those with the stomach to hang on or dive in. That may take a while though. In the near term, however, plenty of investors are content to sit on their hands as the terrain grows shakier around them.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net