The collapse of junk bonds reminds me of 1994-95 when Greenspan’s Fed raised interest rates. That led to many bankruptcies in the high yield bonds which plowed its way throughout the high yield space.

The Fed’s ZIRP monetary policies over the past 7 years have led to a boom for income seekers generally. On the buy menu were junk bonds which were sold to investors with “no worry” labels. We have warned here for over a year that a day of reckoning was at hand. The past year has seen a steady outflow of assets from funds focused on the space.

It shouldn’t surprise that Thursday the first public fund, Third Avenue Credit Mutual Fund, declared it would halt current redemptions of its high yield fund. The negative ripple effect through the space was immediate.

Junk bonds overall trade like high beta stocks. Risks are high no matter having funds spreading their risk over a number of issues. They all sell-off in the stampede to the exists.   

Stocks overall sold-off heavily given high yield difficulties and declines in commodity markets once again. Only highly rated Treasury bonds escaped Friday’s selling fury. Along the way, gold and gold stocks were just a little higher on the session.

So, now pundits universally agree the Fed will be raising interest rates Wednesday a la Greenspan in 1994/95. Perhaps given the onslaught of investor worries, they may buckle under the pressure. Even so, their moment to raise interest rates from their “emergency” levels passed years ago when the recession ended. So their mistake was staying too long with these policies to frankly please Wall Street. That cheap credit allowed for stock buyback financings along with M&A but few investments for long term growth.   

Market sectors moving higher included: Volatility (VIX), Bonds (TLT), Gold (GLD) and Gold Stocks (GDX).

Market sectors moving lower included: Everything else with a ticker symbol.