The risk is you see an old fashioned credit crunch

A sharp sell-off in the high-yield market has got a lot of people very worried.

The market for risky debt has been weak since summer, but the sell-off accelerated late last week, when the closure of the Third Avenue Focused Credit fund spooked the market.

Since then, high-yield credit fund Lucidus Capital Partners has also announced plans to close.

A fund that tracks the debt of riskier corporate borrowers - the iShares iBoxx $ High Yield Corporate Bond ETF - fell to its lowest level since early 2009 on Monday.

That has a lot of people on Wall Street voicing concerns.

In a note this morning, Jim Reid at Deutsche Bank asked whether today will be the last full day of the zero interest rate era, with the Fed expected to hike on Wednesday.

Here is what he said (emphasis ours):

Unfortunately it's probably not that dramatic as we think the Fed will struggle to get that far off lift off before the cycle eventually turns over. If the next recession comes in the next couple of years it's hard to imagine Fed Funds being high enough that the Fed will be able to avoid returning to zero again with risks that QE4 will be needed. So today likely marks the last full day of near zero US rates for now but it would be heroic to think we won't see them again at some time over the next 2-3 years.

According to Reid, a lot depends on when the cycle turns. He said his team thinks the cycle continues in 2016 with risks mounting in 2017, but that if they are wrong it will be because of the "deepening stress in HY". Here he is again (emphasis ours):

Something always kicks you into recession and although we don't think this event is quite big enough to do so at the moment it is a genuine risk. So US HY should get a lot of deserved attention over the next few days, weeks and months, especially for any signs that the recent fund suspensions encourage a vicious cycle in other stressed funds. Liquidity is very bad for normal sizes in credit so if you saw larger fund unwinds or more of them it would be very problematic. The risk is you see an old fashioned credit crunch that extends to the highest quality borrowers which in turns hits global financial confidence.