One of the little-discussed by-products of the massive financial market turmoil since the end of March is who the losers might be.
Aside from investors, of course.
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There will be some casualties among traders who are suddenly forced to sell securities to meet margin calls.
They’d bet too much on risky stocks or on high-yield bonds, whose value slumped when stocks fell.
Related: Stock Market Today: Stocks end mixed amid $9.5 trillion global wipeout
The price of a bond is sum of the present value of the regular coupon payment (usually paid twice a year) and the present value of the principal value of the bond.
When rates go up, the value of the income stream and the underlying bond must both fall.
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How a selloff can cause big problems
If the position was built with a lot of borrowing, these investors might be forced to sell assets to make good on their obligations.
When a situation like that arises, an investor often starts to fix the problem by selling his most valuable holdings first, according to Jeffrey Gundlach.
Gundlach, CEO and chief investment officer of DoubleLine Capital, described the scenario during an interview with CNBC.
Gundlach said he began to see forced selling on Friday when the Dow Jones Industrial Average fell 5.5% and the Standard & Poor’s 500 Index dropped nearly 6%.
And on Monday, the forced selling became even more visible amid wildly gyrating stock prices. Bond yields went up, and that depressed the market value on the bonds.
Gundlach said he didn’t think the selling is done. The S&P 500 could bottom at 4,500. But he added, “I think someone is going to go bankrupt.” He was quick to add he knew of no one in trouble.
But maybe these investors will dodge the bullet on bankruptcy.
The stock market rebounded from morning lows that saw the S&P 500 fall to an intraday low of 4,835.04. That dropped the relative strength index for the S&P to a value of 19.
RSI measures whether a stock is overbought or, in this case, oversold. Below 30 means something is oversold.
That 19 level is considered by some to be a screaming buy signal, and futures trading Monday was signaling a big relief rally on Tuesday.
Related: Here’s what a Fed official calls central bank’s bigger challenge
How to see the data
Many bonds are not traded on organized exchanges. So it can be hard to see the math of what Gundlach was talking about.
You can see it in the behavior of the SPDR Bloomberg High Yield Bond exchange-traded fund (JNK) . Shares of the ETF fell 0.9% to $91.61 Monday and are down 5.7% since hitting $97.12 on Feb. 28.
The savings grace so far is that the ETF sports a distribution yield of 6.94%.
The ETF is invested almost entirely in bonds rated BB or lower. Yahoo Finance data indicates it buys bonds in the energy industry. Energy is among the most volatile industries around.
So, if interest rates go up or oil-and-natural gas prices go down, the fund price falls.
Related: Veteran fund manager unveils eye-popping S&P 500 forecast
