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Speculative Market Melt-Down Advances

March 25 (EIRNS)—The financial markets are buckling in various sectors, despite the fact that the U.S. Federal Reserve has pumped in $3.2 trillion in liquidity into them over the past three weeks. Some of the leading features include:

As of March 22, corporate bond prices had fallen 17% since February. For the week of March 16-20, investment grade corporate bond funds experienced $35.6 billion in withdrawals, which is reportedly a record, as investors become frightened. This is furthering the restructuring of the $10 trillion corporate bond market, so that only one-third of corporate bond debt is trading above BBB−, which is junk bond level, and an enormous 66% is trading below that.

Accordingly junk bonds have lost 21% of their value, and are trading at 79¢ on the dollar, or lower.

One of the most vulnerable parts of the corporate bond and loan market, the oil shale industry, is collapsing at break-neck speed, as the price of crude oil in the United States has plunged to $25 per barrel.

Multiplying the problem is that there are various derivatives, such as credit default swaps (CDS), a market of more than $10 trillion, which are pyramided onto the backs of corporate bonds. When corporate bonds fail on large scale, it will ravage corporations, but the accompanying failure of CDS could bring down the world derivatives market.

Mortgage-backed securities are like the living dead returned from the grave, as their level in the U.S. has reached $9 trillion. Exemplary of the problem is the AlphaCentric Income Opportunities mutual fund, which at the end of 2019, had $4 billion in assets under management, of which it invested more than 60% in risky MBS, some of which were “legacy” MBS, that was issued before the 2008 crash, went bankrupt, was bought up for pennies on the dollar, and then re-traded. Last week, AlphaCentric lost 30% of its value, and is desperately trying to sell $1 billion of assets with no takers.

Quietly buried in the Federal Reserve’s manic buy-back program, was its purchase since March 16 of $100 billion of mostly freshly-minted MBS.

The $3.3 trillion hedge fund sector is experiencing losses and withdrawals. As of 2019, hedge funds have a very high leverage of 7.7 times. That means if a hedge fund buys an instrument for $870, it borrows $770, and puts up only $100 of its own money. That produces a gain if the instrument turns a profit; however, if it turns a loss, the hedge fund has 7.7 times leverage to pay off, but no means to do so. The Fed has been trying unsuccessfully to bail out part of the hedge fund sector, through repurchase agreement actions since Sept. 16, 2019.

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