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The bond market speaks softly but carries a gigantic stick, Jim Cramer said on Friday. In his many years of investing, Cramer has learned that he must always keep an eye on what is happening in the credit market and how bonds are trading.
The reason why Cramer monitors credit and bonds is because investors need to know if there are issues with solvency and liquidity. It is important to know when a company is so stressed that they cannot access the debt market to raise money.
"I always point these risks out because I have been blindsided by just focusing on equities many times in my life, so my ear is to the ground in this bond market world," the "Mad Money" host said.
Friday was a day where Cramer's ears were burning with concern because of the troubles discovered with a high yield bond fund run Third Avenue Management. It decided to bar investors from getting their money out of its Focused Credit Fund, because it could not meet demands to get cash back to them in an orderly way.
This was significant because when it tries to sell the bonds needed to satisfy these orders for redemptions, it could destroy the high yield bond market because there are no buyers anywhere near the amount that want to sell.
"I cannot emphasize enough just how disconcerting this move is," Cramer said.
Read more from Mad Money with Jim Cramer
Many investors put money into mutual funds with the expectation that when they want their money back, they can do so. These securities are not hedge funds with lockups that prohibit redemptions. The purpose is to offer liquidity to investors.
But if there is no liquidity to the investments themselves, then the whole purpose of a mutual fund is called into question. Third Avenue said it would put positions into a liquidating trust and sell them over time in order to return the money. But who knows how much will be left by the time that liquidation is over?
According to the Wall Street Journal, Third Avenue did not contact the SEC before it barred redemptions because it needed to act fast to preserve what was left with the fund. That was an unprecedented move.
Cramer is concerned that the market for high yield debt has so little liquidity, that investors that own any fund with this kind of junk in it should be worried. There is perhaps as much as $1.4 trillion of this kind of high yield paper out there, and it is exactly the kind of yield that Cramer has always warned not to reach for.
"I have to alert you to my more negative stance. This too shall pass, but call me distressed by the actions of this distressed debt fund," Cramer said.
As much as he wants to think that this was a one-off development and won't happen to other funds, Cramer cannot guarantee that. This is certainly the case, considering that the Federal Reserve is poised to raise rates next week, which could only make the problem worse.