By allowing ads to appear on this site, you support the local businesses who, in turn, support great journalism.
Are high-yield bonds on the verge of collapse?
When the Third Avenue Focused Credit Fund investment firm collapsed last week, it reopened scrutiny of the market for junk bonds, which have been a major player in fueling the high capital flowing to tech startups. - photo by Daniel Bendtsen
In March 2009, the value of stock on the Dow Jones Industrial Average had been cut in half in barely more than a year.

Less than a decade later, questionable investing on Wall Street is alive and well. Junk bonds which offer high interest at high risk have remained popular in an era when dozens of tech companies and app makers reach valuations of $1 billion each year. Everyone wants to be on board with the next Airbnb or Uber, but that involves a lot of guesswork.

Third Avenue Focused Credit Fund which focused on the riskiest areas of the junk bonds collapsed last week, announcing liquidation and a plan to block investors from getting their money back, CNN reported.

"Is this just the tip of the iceberg? Are there more funds having similar distress? These things tend to snowball," questioned Michael Block, chief market strategist at Rhino Trading.

According to The Wall Street Journal, the popularity of junk bonds increased in 2009 during a time when interest rates were historically low. Insurance companies typically conservative investors even began buying junk bonds at high rates.

The demise of Third Avenue, however, led to a major sell-off earlier this month, which in turn hurts other investors.

Billionaire investor Carl Icahn told CNBC that the junk bond market is a keg of dynamite that sooner or later will blow up. However, New York Times columnist James Stewart said last week that Third Avenue isnt that canary in the mine shaft that Icahn thinks it is. The junk bond market has stabilized in the past week; many investors (and even Federal Reserve Chairwoman Janet Yellen) have indicated that Third Avenue was an anomaly.

Even if Third Avenues implosion isnt a sign of things to come, it has reignited debate over whether major investment in $1 billion tech startups nicknamed unicorns are creating an investment bubble similar to the overly optimistic housing market that fueled the recent recession.

The value of unicorns has doubled since 2014, and, according to The Economist, the top 144 tech startups combined are valued at more than $500 billion.

However, growth has slowed in the past six months, and the newsmagazine said capital shortage is a healthy correction for an industry that tends to polarize opinion.

Even if these tech startups are highly overvalued, research by law firm Fenwick & West indicated that, on average, their valuations would need to drop by 90 percent for investors to lose money.
Sign up for our e-newsletters