The Third Avenue’s decision to liquidate raised fears of a junk bond crisis

By FXStreet FXStreet (Mumbai) – Given that interest were held at record low levels by the Federal Reserve for almost seven years it is hardly surprising to note that risk taking on Wall Street had increased manifold. Investors had all flocked to Wall Street looking for higher returns in their bond portfolios. The nominal dividend yield on these stocks exceeds that of the 10-year Treasury note. This feature increased the lucrativeness of the bond market for investors who were reeling under the impact of prolonged low interest rates. Yields are extremely high on junk bonds as they are among the riskiest bonds one could purchase. People are ready to take risk of default given the tempting reward.

The news of the Third Avenue Focused Credit Fund announcing that it was liquidating was bound to raise hell raising fears of a crisis similar to the one caused by subprime mortgages in 2007-2008. Investors worry that the high yield debt market might collapse. Carl Icahn, who has created his at over $21 billion fortune using junk bonds described the junk bond market as a “keg of dynamite that sooner or later will blow up.” He has warned that a lack of liquidity …read more

Source:: FX Street