As we noted last week, there is always something to worry about. Yesterday, we discussed the risks being created by exchange-trade products, quoting a Mauldin Economics column.
In his column, “Kill the Quants,” writer John Mauldin also expressed concern about high-yield bonds and high-frequency traders.
Based on his contacts in the high-yield market, Mauldin wrote that investors have no understanding of how much of the market has been sold, how poorly the covenants are managed and how badly investors are going to be treated.
As we noted last week, there is always something to worry about. Yesterday, we discussed the risks being created by exchange-traded products, quoting a Mauldin Economics column.
In his column, “Kill the Quants,” writer John Mauldin also expressed concern about high-yield bonds and high-frequency traders.
Based on his contacts in the high-yield market, Mauldin wrote that investors have no understanding of how much of the market has been sold, how poorly the covenants are managed and how badly investors are going to be treated.
“You watched this last week as the VIX (volatility index) fell out of bed,” he wrote. “I am telling you that what is going to happen in the high-yield market is going to be more – much more – of the same. It’s going to seemingly fall out overnight. The bids are going to disappear, and high-yield bonds are going to be sold to what are essentially distressed-debt funds at distressed-debt prices.”
The amount of high-yield debt that has to be rolled over will become more significant late in the year and over the next couple of years and it is going to have to be rolled over at higher interest rates.
“There will be some companies that will be able to handle those rates,” Mauldin wrote, “and there are some companies that are simply way out over the tips of their skis, trying to schussboom down a double black diamond slope, and the outcome is going to closely resemble one of those ‘agony of defeat’ moments from the old Wide World of Sports TV show. We’re talking some spectacular face plants. You do not want to be involved, unless from the short side, when that happens.”
By raising interest rates, he noted, the Federal Reserve Board is inadvertently increasing the risk for these funds.