In the bond market, you can get liquidity or safety or yield — but not all three at the same time. Sometimes, even two out of three is a stretch.
The recent suspension of redemptions at Third Avenue Management’s Focused Credit Fund has been a reminder of that. It has caused plenty of angst about the junk bond market, with rising concerns about liquidity.
If this sounds familiar, it is. Anytime investors reach for yield, the risk of illiquidity and accompanying loss of capital — they often go together — are present. It’s a tradeoff, one that investors and speculators alike accept.
The typical bond portfolio owned by asset allocators — this includes everyone from big pension funds to low-cost indexers to the robo-advisers — contains a small slug of junk. Junk is part of a balanced fixed-income allocation that includes Treasuries, corporate debt, Treasury inflation protected securities, munis and in some cases real estate investment trusts. Most allocators have only 5 percent to 15 percent of their portfolios in high yield debt.
Perhaps what’s most surprising amid all the fuss is how instruments such as iShares iBoxx $ High Yield Corporate Bond Exchange Traded Fund and Vanguard High Yield Corporate Fund have performed. They are down modestly and the damage done to investors, while annoying, is manageable.
Continues here: Pain for Leveraged Junk Bond Funds