Bill Gross: High-yield pain is the start of something

Gross: There's a price for illiquidity

Stresses in the high-yield bond market mark the start of a new trend, according to bond expert Bill Gross, but it's not necessarily cause for panic.

Anxiety about junk bonds were fired up on Friday after investment firm Third Avenue Management froze investor withdrawals from its nearly $1 billion junk bonds fund. Amid turmoil, the company announced its separation from CEO David Barse on Monday. Uncertainty persists ahead of the Federal Open Market Committee meeting this week.

These comments echo previous remarks Gross has made regarding the high-yield market being less liquid than some assume. "It's the start of something, not necessarily something bigger," Gross, portfolio manager at the Janus Global Unconstrained Bond Fund, told CNBC's "Power Lunch" on Monday.

Yet while Gross said it's hard to know the overall impact of the new trend, he acknowledged that there is tension in the market.

"There's no doubt that mutual funds and ETFs are, in some cases, strained for liquidity," Gross said. "High-yield credit doesn't do well as highly levered companies find it difficult to cover interest expenses."

Peter Fisher, Senior Managing Director, BlackRock.
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The increased anxiety about high-yield liquidity is making it tough for investors — as many may want to get out they may find an unappealing price spread between the bid and the ask, Gross explained. The bid and the ask, which typically differ half a point, may differ up to a point and a half today, he noted.

Despite some suggestions that the high yield tensions are temporary, Gross said, it is now a "changed world" for the market's liquidity.

"Up until this point over the past several years, it's been the central banks that have provided liquidity," Gross noted. "And the market is beginning to sense that that liquidity provision perhaps will be drawn back a little bit."

But when the long-awaited Fed hike comes — as most expect it to — later this week, it will likely be accompanied by a dovish statement that calms investors, he forecast.

"That would, should, comfort the market in terms of liquidity, but there's no doubt going forward that it's a changed world in terms of liquidity and that a buyer and a seller must realize that what was a normal spread before is certainly extended now and into the future," Gross added.

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He said the Fed should consider the high-yield market in its meeting this week.

For those looking to put fresh money into bonds, Gross suggested municipal and corporate ETFs, naming Reaves Utility Income Fund, Duff & Phelps Global, and even former employer PIMCO as potential management firms to consider.