Billionaire investor Wilbur Ross says the decline in junk bonds is putting pressure on higher quality corporate debt in an energy "daisy chain."
"There are no bids for the energy bonds. So if you have a liquidity need you've got to sell something that there's a bid for. That's starting to bring down the rest of the market," he told CNBC.
Ross joins a growing list of high-profile investors warning about the potential meltdown in the high-yield market.
Companies are running out of time, and with the Federal Reserve apparently ready to hike interest rates there are options for cheap refinancing as $1.4 trillion of debt is about to come due, CNBC reported.
"You have a wall of maturities starting in 2018, building up through 2021 [and] 2022," Ross said.
“I think what's happening is several things. The energy bonds have been killed for quite a little while. That in-turn has put pressure on the higher quality things because there are no bids for most of the energy bonds so if a liquidity need it's starting to bring down the rest of the market," he said.
"So starting out with the problems in energy and if somebody will come up with a few million bonds in a JCPenney push down the whole retail sector because the banks no longer are really trading. In general they're pulled back and a lot of the hedge funds are shutdown for the year,” he said.
While the trading landscape remains volatile, he doesn’t think “think the fundamentals are as scary now as they were in 2007-8.”
He also sees opportunities in shale.
“We have been buying the busted bonds of some of the smaller exploration production.”
To be sure, investors are rushing out of junk bonds, spooked by last week's closure of a mutual fund focused on some of the lowest-quality, highest-yielding bonds.
The shutdown comes on top of fears that a spike in bond defaults is coming, and it's led investors to rush for the exits in a corner of the market that generally doesn't handle such things well, the AP reported.
"Investors took more and more risk without even knowing it," said George Cipolloni, a co-manager of the Berwyn Income fund.
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