Tag Archives: redemption gates

The Credit Market Collapse Intensifies – Redemption Gates Up Next

In the summer of 2014 I warned that liquidity was beginning to leave the credit markets and that mutual funds and hedge funds eventually would be instructed by the Fed to implement redemption “gates.”  We are getting closer to this reality.  As the credit market collapse advances, what has happened to the fund described below will spread to the majority of non-Treasury based fixed income funds.

If you own any bond mutual funds of any “flavor,” I am strongly suggesting that you stop reading this and pick up the phone and call your investment advisor or brokerage firm or mutual fund custodian and sell all of your bond fund holdings.  You will eventually regret ignoring this advice.

These “gates” are a mechanism to prevent you from taking your money out of a mutual fund at the fund’s discretion.  They are used when the value of redemption requests is higher than the fund’s ability to sell its holdings in order to meet the requests.  It generally means that a fund is marked too high on its assets and the market for the fund’s holdings is highly illiquid (i.e. no one wants to buy the bonds held by the fund).

The junk bond market is collapsing and it’s not just the triple-C tranche of assets.  it’s everything.  The problem is manifesting openly in the triple-C segment but it’s the tip of the iceberg.

As Zerohedge first reported, Third Avenue Fund’s “Focused Credit” junk bond fund has blown up.   This is the direct way of saying that it has announced that it is liquidating.   it has suspended the ability of fundholders to request a redemption.   While it attempts to sell its garbage, it has announced that it will make a cash distribution to fund holders with what little cash it has on hand.  It will place the remaining fund holdings in a “liquidating trust” which will try to sell off the bonds that it can’t sell now.

A colleague of mine showed me some proprietary information that his firm had compiled on this ThirdUntitled Avenue Fund. Before I describe what was in the fund, let me just say that I am confident that none of the investment advisors, financial planners or securities brokers who put their clients into this fund had any clue how risky this fund was.

Up until early 2015, this fund had up to a negative 50% cash weighting.  This means that it had 50% “effective leverage” – it was more than 100% in the junkiest of the junk bond market.  Of that leverage, 97% was invested in C-rated bonds.  In other words, this bond fund was the equivalent of Fukushima nuclear waste.   As of July 2015, the fund had managed to raise about 10% cash and remove the leverage.    I assume that is around amount that will distributed.  Investors will thus receive about 10% of the quoted NAV in cash.

That’s not to say investors will get 10% of their original investment.  Depending on where the fund was valued when they invested, they will be getting back substantially less than 10% of their original investment.  There will be little to no hope of getting much beyond that, as most of the bonds in the fund are utter toxic sewage:  LINK.

Before you bristle at the thought of taking a loss on your current bond fund holdings and sweat over the thought of not earning any interest on that capital, you better contemplate the possibility of not being able to get most if not all of that money back at all at some point. Think about the people who watched in horror as their beloved Kinder Morgan stock dropped $44 in April to $16 now.  The whole way down they refused to sell because “it was too cheap.”  Really?

Those who wait are going to suffer through the eventual reality of having their money trapped in the bond market.  I’m not making this up.  There have been multiple warnings issued over the last year by several sources, including this website, that the credit markets were becoming very illiquid.  The Third Avenue Fund above is evidence of this and it’s not an “outlier.”   Most fixed income funds have hidden leverage and derivatives. Get out now while you can.

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BlackRock’s Warning: Get Your Money Out Of All Mutual Funds

BlackRock Inc. is seeking government clearance to set up an internal program in which mutual funds that get hit with client redemptions could temporarily borrow money from sister funds that are flush with cash.  – Bloomberg News

We may have been early on warning about leaving your savings in the financial system. It’s okay to be too early getting your money out of the system but it’s fatal to be just one second too late.  The gates are already in place in money market funds just waiting for the signal to be lowered

BlackRock’s filing with the SEC to enable “have cash” funds to lend to “heavy redemption” funds should send shivers down the spine of anyone with funds invested in any BlackRock fund.  In fact, it should horrify anyone invested in any mutual fund.

Larry Fink, BlackRock’s chief executive officer, said in December that U.S. bond funds face increased volatility, adding that he expected a “dysfunctional market” lasting days or even weeks within the next two years.   – Bloomberg

I warned last summer when the money market funds received authorization to put redemption gates in place that it was time to remove your money from these instruments.  The only reason a gate would be needed is if the people running the funds believed that there were risk events coming that would necessitate the gates.

BlackRock has already arranged credit lines from banks to cover the possibility of a redemption stampede from its riskier funds.  It’s clear the elitists running BlackRock now foresee events coming that will trigger a redemption run because the fund company is seeking SEC approval for the ability to take cash from funds with cash and lend that cash to funds that will need cash when the redemption rush begins.

Rather than let the market decide the value of the investments in BlackRock’s riskier funds, Larry Fink is going add even more leverage to the equation by enabling riskier funds to take on debt in order to avoid having to sell positions into a market that won’t be able to handle the selling.   This adds yet another layer of fraudulent intervention to a system that is ready to blow up from what’s already been done to it.

And let’s not forget, as I pointed out last summer, that BlackRock funds are already riddled with OTC derivatives, which is why Vice Chairman Barbara Novick has been running around Capitol Hill working to get a bailout mechanism in place for the Depository Trust Company’s derivatives clearing unit.

BlackRock Changes The Rules Of The Game Because Of An Outcome It Fears

This move will, in effect, transfer a portion of the risk of BlackRock’s riskier mutual funds – derivative-laced high yield and equity funds – to its more “conservative” funds, like high grade, short duration fixed income funds.


Anyone who invested in less-risky funds did so with an understanding of the definition and risk parameters of the funds at the time of investment.  But now BlackRock is changing the rules and risk parameters of those funds by exposing them to the counterparty risk of the riskier funds in the BlackRock fund complex which will be able to borrow money from the less risky funds.

This means that the Treasury fund in which your IRA or 401k is invested will now be “invested” in any fund that borrows money from the fund with your money.  The risk profile of your “conservative” fund assumes the risk profile of the riskier fund. Because of this, there is absolutely no reason for anyone to leave any of their money in any of BlackRock’s funds.

The SEC should deny BlackRock’s filing.  But it won’t because Wall Street is the SEC.

This move by BlackRock also signals that the elitists at BlackRock foresee an event that will disrupt the markets and trigger “bank” run on mutual funds.  What or when is anyone’s best guess.  But the fact that Larry Fink has decided to implement internal lending among funds indicates that he and his band of merry criminals believe an event will happen sooner rather than later.

To me, this is the signal that everyone should call up their mutual fund company, financial adviser or 401k administrator and get all of their the money out of any mutual fund.  Larry Fink has done everyone invested in any mutual fund a favor:  he’s unwittingly signaled that it’s time to get out – now.   Anyone who is aware of this and does not take action immediately is either a complete idiot or simply does not care about having their money taken from them by the criminal elite.