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US ‘Junk Bond’ Market to Crash on Fed Hike

US ‘Junk Bond’ Market to Crash on Fed HikeUS ‘Junk Bond’ Market to Crash on Fed Hike

US higher-yielding debt securities, known as ‘junk bonds’, suddenly posted their greatest drop since 2011 in the past two trading sessions on Wall Street, just as ‘Fed week’ is starting on Monday.

The US Federal Reserve is widely anticipated to hike base borrowing rates during the December 16-17 Federal Open Market Committee meeting, but even if the regulator remains in the bond market, the steep rout in high-yielding bonds might signal an end of the six-year rally in US securities, Sputnik reported.

Another potential consequence of the brewing junk bond market crash could be a wave of bankruptcies in the currently hot areas of the US economy like shale oil small caps, metals producers and select financial services.

The higher-yielding bonds in the US are high-risk securities issued by commercial enterprises exposed to various combinations of hazardous factors, yet involved in lucrative operations like oil drilling and mining, capital investment and diverse financial services. Saturday, Wall Street witnessed massive money withdrawals from the $789 million worth Third Avenue Focused Credit Fund after its management failed to pay its investors for months.

Traders are exiting stocks as well ahead of the Fed decision on monetary policy. Nobody is certain of the consequences of a hike in interest rates for their own business, and market participants are dumping risky assets.

Against that background, prices on risky bonds tanked to their six-year lowest with yields skyrocketing, signaling a rising toxicity and a possible collapse of such assets. The iShares iBoxx $ High Yield Corporate Bond exchange-traded fund, a benchmark of the US junk bonds, shed 2% on Friday to its lowest since mid-July 2009.

Financialtribune.com