Today in “Things To Panic About Even Though You Don’t Really Know What They Are”: junk bonds. Ahhhhh!
What is happening in “the markets” this week, you may be asking yourself? I’ll tell you: lots of things. The Fed is probably going to raise interest rates for the first time since the Great Recession, which is making everyone nervous. Oil prices continue to drop lower and lower, which is making everyone nervous. And on top of all that, we have the makings of a junk bond crisis, which is making everyone nervous.
Last week, a respected investment fund called Third Avenue abruptly announced that its junk bond fund had essentially collapsed. What did this development do? That’s right—it made everyone nervous. Here it may be useful to take a step back and answer the question, “What are junk bonds?”
Junk bonds are crappy bonds that pay better than safer bonds, because they are more risky and prone to default. That’s what junk bonds are. (Eschew more nuanced explanations!) When times are good, money people sink lots of money into junk bonds. “Times are good—these shitty bonds will not default!” they think. Sooner or later times turn bad and the shitty bonds do start defaulting, and then there is PANIC among all of the money people who thought that their money was safe in these risky bonds.
Are we approaching PANIC time now? As an internet blog that traffics in thinly sourced innuendo for the purpose of whipping our readership into a frenzy, our answer is: yes. But don’t “take our word” for it. Perhaps you’ve heard of a little paper called... The Wall Street Journal?? They report that “junk-bond prices posted their largest drop since 2011 on Friday,” and that money people fear the rout could continue this week—and spread to the stock market, the rest of the bond market, and who knows where else, as PANIC sets in and investors start selling off holdings in order to raise cash.
Ryan Wibberley, chief executive of Gaithersburg, Md.-based CIC Wealth, said the liquidation of the Third Avenue credit fund likely won’t be an isolated incident.
“I’m not normally a doom-and-gloom type of guy, but this is scary,” he said.
Mmm hmm. Quite a few high profile money people are predicting a “contagion,” including the collapse of who knows how many hedge funds, which will inevitably screw you, the little guy, somehow, because don’t it always go like that? It sure does. Matt Levine, who has been writing about troubles in the bond market for years, calls this bond crisis “the most anticipated crisis” since the tech bubble, and yet here we are—still standing on the edge of (maybe) a crisis that will shock the financial markets and (probably) cause you, the little guy, to panic.
Unduly? That remains to be seen.