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Forbes' Tim Worstall: Blame Junk Bond Market Collapse on Fed

Forbes' Tim Worstall: Blame Junk Bond Market Collapse on Fed

By    |   Monday, 14 December 2015 06:30 AM

With all of the carnage and volatility in the junk bond market this week, and with Carl Icahn warning this is just the beginning, experts are looking for the cause.

Forbes.com contributor Tim Worstall pins the blame on the Federal Reserve and its quantitative easing program of recent years.

"For the point, purpose and aim of the QE program was to get people to go invest in riskier assets. And junk bonds certainly meet that definition: so, lots of people did go and invest in junk bonds," he wrote.

"Now that the era of low interest rates is drawing to a close, even if QE isn’t as yet being reversed, then we’d rather expect to see a decline in that junk bond market."

Starting in 2009, investors poured tens of billions of dollars into U.S. junk-bond mutual funds, propelling a bond-issuance boom that filled the coffers of low-rated companies, he explained.

"The firms invested the funds in new businesses as well as buying back shares and making acquisitions. Those moves supercharged the rally in the U.S. stock market. Major indexes have more than doubled since the low hit in March 2009," he wrote.

"This was the entire point of doing QE in the first place. No, not to double market indices, rather, to raise the price of safe assets like Treasurys. Given that bond yields move inversely to price this meant that you just couldn’t gain an income of any size from buying Treasurys. That was the point: to make investors go out along the yield curve in search of income," he said.

"And it obviously worked: people went out into the junk bond market. But now we’re coming to the end of that era. True, the Fed isn’t reversing QE as yet, they’re still topping up the stock of assets as they mature but they are about to raise interest rates," he said.

"Thus people will, having been prompted to artificially go out along the risk curve, start to come back in along the risk curve. Junk bonds should therefore decline in price relative to safer assets. Which is what is happening."

To be sure, U.S. junk bonds posted their steepest decline since 2011, intensifying fears that a six-year bull market in stocks and other risky assets is nearing an end.

And one prominent investor warns this carnage is only the start of something much bigger.

“The meltdown in High Yield is just beginning," billionaire investor Carl Icahn wrote on his verified Twitter account Friday.

Icahn’s comments came after Third Avenue Management froze withdrawals from a $788 million credit mutual fund.

Outflows from U.S. high-yield bond funds are running at the fastest pace in more than a year, as U.S. junk debt has declined 3.6 percent, the first annual loss since 2008, according to Bank of America Merrill Lynch Indexes.

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With all of the carnage and volatility in the junk bond market this week, and with Carl Icahn warning this is just the beginning, experts are looking for the cause.
junk bond, collapse, market, forbes
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2015-30-14
Monday, 14 December 2015 06:30 AM
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