BAML: 'It's death by a thousand paper cuts'

The high-yield market is in the midst of a meltdown.

The sell-off accelerated late last week, when the closure of the Third Avenue Focused Credit fund spooked the market.

It continued into Monday, with one fund that tracks the debt of riskier corporate borrowers― the iShares iBoxx $ High Yield Corporate Bond ETF― falling to its lowest level since early 2009.

Michael Contopoulos, head of high-yield and leveraged-loan strategy at Bank of America Merrill Lynch, told Business Insider that the sell-off isn’t in response to any one single event. Instead, he said, it is the result of a confluence of factors.

“It’s death by a thousand paper cuts,” he said.

Here is what he said:

  • “The high-yield story has been one that’ been playing out since June.”
  • “The riskiest part of the market is selling off,” he told Business Insider.
  • “We still expect a pretty weak year in 2016,” for high-yield bond issuance, adding that it will be down 10% at least.
  • “We think defaults are going to start to pick up” in 2016 as banks tighten up on lending.

He isn’t the only one concerned about the high-yield market.

Goldman Sachs’ Lotfi Karoui said 2015 represented “the worst non-recession year” for high-yield debt, while Carl Icahn called the high-yield market “a keg of dynamite that sooner or later will blow up.

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