The selloff in the bellwether high risk corporate debt market is spreading fears that the U.S. economy is on less sound footing than investors thought.
On Monday, the widely-traded iShares iBoxx $ High Yield Corporate Bond ETF – essentially a basket of junk debt -expanded its losses for the year to 12 percent. A competitor product, the SPDR Barclays High Yield Bond ETF, expanded its losses for the year to 13.4 percent.
Seven years after the credit crisis, the recent failure of a handful of funds investing mostly in distressed debt has taken on a mythic quality in the minds of some investors who view debt markets as a leading indicator of problems that could later haunt stocks and the economy.
“Liquidity-supported markets, which is what we have had for a while now, are particularly vulnerable to the possibility of policy mistakes and/or market accidents,” said Mohamed El-Erian, chief economic advisor at Allianz SE, speaking of the U.S. Federal Reserve’s multi-year policy of holding interest rates low and propping up the bond market with big purchases.
“Investors today are worried about both, given the evolving divergence in monetary policy and the liquidity problems in certain market segments” including the energy-heavy corners of the corporate debt market.