Bloomberg reports A Mutual Fund Whale Makes Big Bets on Junk Bonds—Using ETFs.

In early February, most of the investing world was watching stocks take a tumble. Matt Pasts, the manager of BTS Tactical Fixed Income Fund, which was invested almost entirely in junk bonds, studied a computer model used by his small investment firm in Lexington, Mass. The model gave him a distress signal: Sell. On Friday, Feb. 9, Pasts sold all of his $900 million mutual fund’s high-yield bond investments so that the fund was fully in cash.

Pasts is a market timer, trying to suss out whether the whole high-yield asset class is going to rise or fall in value.

Trading completely in and out of the market is simple for BTS because the fund doesn’t directly hold the bonds. Instead, it has the unusual strategy for a fund of investing almost entirely via ETFs. In late January, before it sold, BTS had about 95 percent of its assets in the two largest junk-bond ETFs.

“A billion-dollar fund that by mandate says it will sell everything to go to cash will create volatility,” says Mike Terwilliger, a portfolio manager at Resource America Inc.

Rude Awakening Coming

Like selling then VIX, this is another one of those strategies that seems destined for a rude awakening. One of these "all in" move is bound to fail at some point.

When that happens (it's guaranteed to - we just do not know when) BTS will at some point pull out creating huge junk bond vacuum, selling into a plunging market.

RECOMMENDED ARTICLES

Rosenberg Tweets

Spreads

Image placeholder title

Chart from November FT article Falling Junk Bond Spreads Trigger Sense of Foreboding.

"Lack of investor protections and the effect of central bank stimulus causes rising concern."

With whales selling in and out at the drop of a hat based on computer models, what can possibly go wrong?

Mike "Mish" Shedlock

Junk Bond Bubble in Six Images

The junk bond to BBB-rated bond spread and the spread between AAA to BBB bonds shows amazing complacency. It won't last.

Junk Bond Bubble in Pictures: Deflation Up Next

The widely discussed "everything bubble" is, in reality, a corporate junk bond bubble on steroids sponsored by the Fed.

Junk Bond ETFs Have Rough Two Weeks: Deals Pulled, Outflows Rise

Volatility has returned, at least in the junk bond market. JNK, the Barclays High Yield Bond ETF, and HYG, the iShares High Yield Bond ETF, both had the steepest decline in three months. Is this another buy the dip opportunity, or is risk avoidance about to take hold?

Illinois Budget Out of Balance Again: Solution More Junk Bonds

An Illinois "Road Show" touts more junk bonds as a solution to a perpetual budget crisis. What a bunch of garbage.

Ford's Bonds Crushed on Moody's Downgrade to One Notch Above Junk

Ford bonds are down 4% after being downgraded to one step above junk. Moody's outlook is negative.

Super-Junk Leads the 2019 Asset Revival

The stock market is unlikely to crack until speculation in junk bonds gets blown out of the water.

Zombification Perfected: Negative Yield Junk Bonds Take Hold in Europe

Expectations of further monetary stimulus depress yields. There are now 14 junk bonds in Europe with a negative yield.

Bond Market Dislocation: What the Hell is Going On?

The "Bond Freak" is wondering what's going on. I have an answer from Lacy Hunt at Hoisington Management.

Too Safe to Fail: Implied Default Rate for European Junk Bond is Negative 1.1%

Apparently, European junk bonds are too safe to fail. Fundstrat Global Advisors’ Thomas Lee says the market-implied default rate for a European junk bond sits at a negative 1.1%.