What Worries Carl Icahn: A Trillion-Dollar Junk Bond Crisis
Carl Icahn isn't shy. And he also appears to be slowly turning bearish on different segments on the U.S. economy.
Three weeks after calling U.S. stocks overvalued, Icahn warned of a crash in high-yield debt at CNBC's "Delivering Alpha" conference on Wednesday in New York City.
The iShares iBoxx $ High Yid Corp Bond (ETF) (NYSE: HYG), which tracks an index of high-yield U.S. corporate bonds, is up 34 percent since the end of 2008. The spread between Triple-C-rated bonds and investment-grade bonds is near a 52-week high, according to data gathered by the Wall Street Journal.
'Who's Going To Buy High-Yields?'
According to Icahn, a rise in interest rates -- an event that has an 80 percent likelihood come December -- could cause a selloff in high-yield debt, also known as junk bonds. "When that gets killed, and there is a run, there is nobody to buy that stuff...I don't know what ramification that can have," he said.
"It sure killed the market in '08 when housing blew up," Icahn added. "Who's going to buy the high-yields?"
BlackRock, Inc. (NYSE: BLK) CEO Larry Fink, on stage with the hedge fund manager, disputed the claims.
"The characterization that everybody's going to be running out of fixed income, I'll take that bet anytime," he said. Fink did admit the bond market could experience isolated failures at specific companies, but doubted that would lead to a mass exodus from the asset class.
A Junk Bond Crisis
It's this very same risk -- the possibility of isolated defaults -- that has Icahn worried about high-yield. "Why should any human being with any sense at all, to get the extra 2 percent, buy high-yield when they could buy a corporate A and not take the risk of losing 40 percent of their money?"
Both did not reach an amicable conclusion. But Icahn's not the first to warn of troubles in this area. In April Jeffrey Gundlach told Wall Street Week a junk bond crisis could occur within the next three years.
Over $1 Trillion At Risk
The effects of such a crisis are generally regarded as serious for the broader economy. Societe Generale warned a selloff in the bond markets could lead to lower earnings expectations on Wall Street.
High-yield expert Martin Fridson said about one third of the $2 trillion market could default over a four-year period in the near future.
One factor flying under the radar? It could be energy. As SitkaPacific Capital's Mike Shedlock wrote late last year, "if oil prices do not head back up, expect outright defaults, and lots of them."
The after-effects of this week's Iranian nuclear deal are expected to increase global oil supply, keeping prices low. WTI Crude Oil has already lost 45 percent in the last year and 13 percent over the past month.
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