Canyon’s Friedman Warns Junk Bonds Face More Third Avenue's

  • Rallies these days are driven by ETF, mutual fund flows
  • `It’s entirely possible' firms will struggle like Third Avenue

Canyon Partners’s Josh Friedman said the rally in high-yield bonds is overdone and investors should be prepared for more Third Avenue Management-type redemptions.

Money flowing in and out of high-yield mutual funds and exchange traded funds is increasingly driving the high-yield market, Friedman said Wednesday in an interview with Erik Schatzker on Bloomberg Television. Such funds, which let investors pull money daily, now account for about a quarter of the market, up from 10 percent before the financial crisis, said Friedman, who’s the co-founder of Canyon.

“I’m worried about the high yield rally,” which has taken place since Feb. 11, Friedman said. “It’s entirely possible that we will see more Third Avenues,” he said, referring to the mutual fund company that stopped returning cash to investors last year after clients sought to pull too much money.

ETF Outlfows

Signs of stress can be seen in the U.S. junk bond market, which has gained more than 12 percent since the markets bottomed on Feb. 11. The largest exchange-traded fund that buys junk bonds, the iShares iBoxx High Yield Corporate Bond ETF, has seen more that 34 million shares, or more than $2 billion, redeemed last week, according to data compiled by Bloomberg.

Despite the rally, Bank of America Corp. last week reiterated its forecast for total returns in high-yield to fall between zero and one percent.

“We continue to make no secret of our distaste for corporate fundamentals,” Bank of America Corp. strategists led by Michael Contopoulos said in a note May 5.

Friedman said he’d seen a statistic recently that more than 30 percent of the high-yield market was made up of names that hadn’t traded this year.

“It’s a credit picker’s market,” he said, adding that his firm was buying a lot before Feb. 11 and have been sellers into the recent rally.

Before it's here, it's on the Bloomberg Terminal.