A mutual fund whale likes to time the junk bond market. The whale is back to "all in" via ETFs.

Bloomberg reports A Mutual Fund Whale Makes Big Bets on Junk Bonds—Using ETFs.

In early February, most of the investing world was watching stocks take a tumble. Matt Pasts, the manager of BTS Tactical Fixed Income Fund, which was invested almost entirely in junk bonds, studied a computer model used by his small investment firm in Lexington, Mass. The model gave him a distress signal: Sell. On Friday, Feb. 9, Pasts sold all of his $900 million mutual fund’s high-yield bond investments so that the fund was fully in cash.

Pasts is a market timer, trying to suss out whether the whole high-yield asset class is going to rise or fall in value.

Trading completely in and out of the market is simple for BTS because the fund doesn’t directly hold the bonds. Instead, it has the unusual strategy for a fund of investing almost entirely via ETFs. In late January, before it sold, BTS had about 95 percent of its assets in the two largest junk-bond ETFs.

“A billion-dollar fund that by mandate says it will sell everything to go to cash will create volatility,” says Mike Terwilliger, a portfolio manager at Resource America Inc.

Rude Awakening Coming

Like selling then VIX, this is another one of those strategies that seems destined for a rude awakening. One of these "all in" move is bound to fail at some point.

When that happens (it's guaranteed to - we just do not know when) BTS will at some point pull out creating huge junk bond vacuum, selling into a plunging market.

Rosenberg Tweets

Powell on the stretch for yield, circa October 2012: “Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road." <1/2>

— David Rosenberg (@EconguyRosie) March 9, 2018

Back then, HY and IG spreads were 538 bps and 177 bps respectively; today they stand at 356 bps and 115 bps. <2/2>

— David Rosenberg (@EconguyRosie) March 9, 2018

Spreads

Chart from November FT article Falling Junk Bond Spreads Trigger Sense of Foreboding.

"Lack of investor protections and the effect of central bank stimulus causes rising concern."

With whales selling in and out at the drop of a hat based on computer models, what can possibly go wrong?