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Falling oil prices lead to junk bonds meltdown

By
Kevin Dugan
Published Dec. 14, 2015, 10:35 p.m. ET

An oil war between the Middle East and the Midwest has caught Wall Street in the cross hairs.

Junk bonds — the debt instruments from companies closest to bankruptcy — got slammed again on Monday as a handful of small energy companies with outsized debt teetered closer to default and the debt investors ran into troubles trying to get out.

The market rout sent BlackRock’s largest junk bond fund falling 1.5 percent, to $78.83 — plumbing depths not seen since July 2009.

The company released a statement last week saying that it stands by its fund and will honor redemptions. But the pain for investors could go on for a long time.

“The meltdown in High Yield is just beginning,” billionaire investor Carl Icahn tweeted on Friday.

The reason for the junk bond rout? Check your gas prices.

The falling price of oil has squeezed the bottom lines of energy companies, making it harder for those that have borrowed a lot of money to pay back their creditors, Guy LeBas, fixed income strategist at Janney Montgomery Scott, told The Post.

On Friday, OPEC pledged to continue pumping oil, keeping the supply high. That sent the price of a barrel of oil briefly below $35 on Monday, the lowest value since 2009.

Part of the reason that OPEC has been pumping so much oil is to put the squeeze on the fracking industry as part of a long-term play, LeBas said.

“OPEC is definitely pumping a lot of oil, and it seems incongruent with the way that oil is going,” he added.

Bond traders were also fretting that investors would soon start running out of cash after three funds — Third Avenue, Lucidus and Stone Lion — stopped redemptions. The CEO of Third Avenue resigned on Monday.

“Just a matter of time,” one trader told the Post. “This stuff always snowballs.”