07/10/18

The Next Bond Crisis: Over $1 Trillion In Bonds Risk Cut To Junk Once Cycle Turns



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The Next Bond Crisis: Over $1 Trillion In Bonds Risk Cut To Junk Once Cycle Turns
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It's been a long time coming.

Last November, still smarting from a year he would rather forget, Russell Clark and his Horseman Capital, i.e. the "world's most bearish hedge fund" unveiled what he would short next: according to Clark, the next major source of alpha would be shorting fallen angel bonds.

Citing a recent IMF Global Financial Report, Clark said that "US investment grade debt is very low quality, and could produce some large fallen angels [and] mutual funds are much larger in the high yield market than they used to be. [L]ow rates means the capital losses are much higher than they used to be. And that investors in high yield mutual funds are much flightier than they used to be! Essentially the IMF are telling me that if you get a large enough fallen angel, the high yield market will freak out, and volatility will spike causing volatility targeting investors to dump leveraged positions. Sounds good to me."

Then, last June, one of the icons of credit and distressed investing, Oaktree Capital, joined the bandwagon of fallen angel hunters, saying that the fund "expects to see a flood of troubled credits topping $1 trillion as rising interest rates overwhelm low-quality loans and bonds." Speaking at the Bernstein Strategic Decisions Conference, Oaktree Capital's Chief Executive Jay Wintrob said that when the cycle turns it will be faster and larger than ever as "fallen angels" proliferate, and added ominously that "there will be a spark that lights that fire."

Oaktree saw the potential opportunity as so pressing that the fund has now allocated about a ....

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