If you haven’t heard, the high-yield credit market is suffering death by 1000 cuts. The most notable event was Third Avenue Management suspending redemptions; in other words, investors cannot pull their money out until after the fund liquidates their assets as their value is declining rapidly and must engage in the “Oh-Shit” Strategy: a fire sale.
As per the Wall Street mantra, most strategists are turning extremely bearish on the high yield market (as they should) as a dirty selloff has begun and investors are seeking safety. This is noted in the movement in the 10 Year and 30 Year treasuries which have drop from 2.3% and 3.1%, respectively, to below 2.2% and 3.0%, respectively. While this does not seem like much, there are a couple implications and potential outcomes.
Today, most of the Wall Street & Main Street expects a rate rise; however, with yields rising from a lower point and global headwinds facing the world economy, markets look poised for “lower for longer.” In other words, investors will continue to have difficulty finding above average yield in most asset classes without moving further along the risk curve. This movement is something that and exponentially grown in the past 18 months, and I believe investors are beginning to take note (as seen by massive sell offs in High Yield as well as “Unicorn” stocks plummeting).