By Ellie Ismailidou, MarketWatch
Activist investor Carl Icahn took to Twitter and CNBC Wednesday to issue a stark warning to investors: “I think the public is walking into a trap again as they did in 2007,” Icahn told CNBC .
Specifically, the 79-year-old investor warned of a bubble in high-yield debt. The prominent investor joins a chorus of voices pointing at frothiness in the so-called junk-bond market, including DoubleLine Capital founder Jeff Gundlach.
In two tweets published on Wednesday, Icahn cautioned against listening to so-called permabulls, saying the 2008 crisis might have been avoided if more investors had warned about the risk of a bubble in 2007, as he is attempting to do now.
On Monday, Los Angeles-based bond fund manager Jerry Cudzil, head of U.S. credit trading at TCW Group, told Bloomberg that he is also building up a big cash stockpile to brace for a bond-market selloff.
This isn’t the first time Icahn has sounded alarm bells. In early May, Icahn warned that “when [high-yield bond funds] start coming down, there is going to be a great run to the exits.”
The selloff may have already started. S&P Capital IQ reported that investors withdrew $2.9 billion from high-yield funds for the week ended June 17 — the biggest redemption in six weeks — on top of another $2.6 billion that pulled out the week before.
S&P Capital IQ
Ultraloose monetary policy underpinned by razor-thin interest rates has been the main driver of investors into so-called junk bonds, which promise to offer richer yields than, say, Treasurys. But the risks in junk debt also are much greater than the typical, higher-quality government bonds.
“The yield advantage over high-quality bonds remains significant and stands out in a low-yield world,” said Antoni Valeri, Investment Strategist for LPL Financial, in a research note.
But yield differentials, known as spreads, between high-yield bonds and Treasuries have contracted over the first half of 2015. This suggests that yield-starved investors are taking higher risks for lower returns.
The average yield spread remains near 4.5%, a level that has halted further improvement among high-yield bonds in the past, Valeri said.
DoubleLine’s Jeffrey Gundlach also warned earlier this year that as interest rates are expected to rise, “the quest for yield will cool down, because that is what’s driving a lot of investment activity.”
For that reason, at a private event on May 5 in New York, Gundlach advised investors to sell high-yield bonds and buy Treasurys, as they prepare their portfolios for the first interest-rate increase in nearly a decade.