It Starts: Junk-Bond Fund Implodes, Investors Stuck

[marmar]

It Starts: Junk-Bond Fund Implodes, Investors Stuck
by Wolf Richter • December 11, 2015


[font color="blue"]And the next crisis hasn’t even begun yet.[/font]

We have warned about “open-end” bond mutual funds, particularly those with a lot of high-yield bonds. We know some folks who got burned when Charles Schwab’s $13-billion bond fund SWYSX blew up during the financial crisis and lost 60% or so of its value before its data went offline.

Schwab settled all kinds of class-action and individual lawsuits for cents on the dollar. It got in trouble over other bond funds. And other purveyors of bond funds got in trouble too.

It works like this: When an “open-end” bond fund starts losing money, investors begin to sell it. Fund managers first use all available cash to pay investors. When the cash is gone, they sell the most liquid securities that haven’t lost much money yet, such as Treasuries. When they’re gone, they sell the most liquid corporate paper. As they go down the line, they sell bonds that have already lost a lot of value. By now the smart money is betting against the fund, having figured out what’s happening. They’re shorting the very bonds these folks are trying to sell.

The longer this goes on, the more money investors lose and the more spooked they get. It turns into a run. And people who still have that fund in their retirement account are getting cleaned out. ................(more)

http://wolfstreet.com/2015/12/11/junk-bond-fund-implodes-investors-stuck-focused-credit-fund-by-third-avenue/

[Old Codger]

1. They never learned

Went right back to the same thing that caused 2008, now it is going that route again ..Maybe a lot worse this time around..

[Eleanors38]

2. At least half of all Used car loans are now bundled & selling as derivatives...

because of even less deregulation.

What the bastards Have learned is they know who picks up the tab.

[navarth]

4. "What the bastards Have learned is they know who picks up the tab."

sadly, yes

[PeoViejo]

6. A lot worse..

People are tapped-out this time.

[AlbertCat]

3. Don't worry!

It's just those "little banks". The big ones have nothing to do with it and are just victims.....

Right? right?

It must be right, because some prominent candidate says so.

[navarth]

5. This kind of stuff worries me

Thom Hartmann has been talking about a 'great crash of 2016'....man I hope Thom is wrong on this one...seems to me he's usually right about things. I'm glad my house is almost paid off.

[LiberalArkie]

7. I think the Republicans kind of guess this is about to happen again.

Remember 2008 McCain/Palen did everything they could to not be elected.
I think they are pulling the same thing again. The last thing the Republicans is to be in the executive branch when it happens again.

[navarth]

8. I'm sure they'd like to blame it on President Obama.

I mean, that's their job after all. I doubt they would care about the veracity.

[NCjack]

9. Investing in open-end junk bonds and not having insider info -- what

could possibly go wrong?