Low Liquidity Fueled Hidden Flash Crash in Junk Bonds [WSJ]

by SpontaneousDisorder

The liquidity problems are interesting, lots of reports of poor liquidity in markets in recent years.

Also interesting that investors are shunning deep junk when there has been an epic binge on risk in the last few months. Should be a clue of whats coming.

via WSJ

When Party City Holdco Inc. reported a large decline in quarterly earnings in November, holders of the retailer’s junk-rated debt scrambled to sell. Buyers were hard to find, and prices cratered by as much as 50% before recovering some of the loss.

Investors who didn’t sell the company’s bonds and loans took paper losses of about half a billion dollars in five trading days, according to a Wall Street Journal analysis of data from MarketAxess and IHS Markit. It was the largest price move since Party City issued the debt.

Such violent price swings were commonplace last fall in the riskiest segment of the roughly $2.4 trillion market for corporate bonds and loans rated below investment-grade, analysis of trade data by the Journal shows, striking a sharp contrast to the relative calm in most markets at the time.

Prices snapped back sharply in December, but the volatility confirmed traders’ fears that poor liquidity—how easily sellers and buyers can transact—in high-yield debt is making the market particularly vulnerable to such flash crashes.

“Given the spikes in volatility, you have to be more tactical in your trading,” said Steven Rocco, a partner and high-yield fund manager at Lord Abbett. “We definitely are weighing liquidity more now.”

Dips in the riskiest segment of the junk bond markets were more extreme this autumn than in December 2018, when volatility ravaged global markets, according to the Journal’s analysis of trade data from MarketAxess.