Easterly fund fire sale a one-off, market participants say

Market participants surprised by the sudden selloff of a high-yield fund last week are cautiously optimistic that it won’t spread to the rest of the market while agreeing the fire sale highlights the illiquidity and flawed pricing that bedevil the opaque corner of the muni market.

“It would be very, very unusual that something like this can happen again,” said Triet Nguyen, vice president of strategic data operations at DPC Data who wrote a book about investing in the high-yield market. “My guess is most of the major high-yield funds are much more diversified.”

Easterly RocMuni High Income Municipal Bond Fund began to sell large chunks of its holdings the second week of June, with buyers snapping up bargains on bonds that priced at sharp discounts to their valuation. The fund’s net asset value started the month at $6.36 and had dropped to $3.09 by Monday. Its net assets totaled $25.1 million Monday, down from $232 million as of March 31.

Easterly previously told The Bond Buyer that it was not liquidating but “repositioned to improve liquidity.” The fund is managed by Troy Willis and Charlie Pulire, who took it over in April 2024, according to the firm.

The distressed trade prints created “a bit of a hangover as accounts digested the materially weaker levels,” Birch Creek Capital said in a June 20 investor note. The “cautious risk appetite” also impacted the primary market when a $250 million nonrated transaction for Noble Waste didn’t gain enough investor interest to clear the market, the firm said, adding that it expects demand to rebound for upcoming deals.

If other funds hold the names sold by Easterly with the freshly distressed print prices, the portfolio managers will likely refrain from selling to avoid taking an actual versus theoretical performance hit, said Jeff Timlin, managing partner at Sage Advisory.

“At this point, it’s contained, but there’s a yellow light flashing,” Timlin said. Investors who are unhappy with their fund statements at the end of the month could trigger some selling, he said. “People are being cautious because if performance is hit, that could be a catalyst.”

Part of the problem is the degree to which junk and high-yield munis have infiltrated the market, said Steven Grey, founder and CIO of Grey Value Management. If a fund has 10% to 20% of below investment-grade credits and the funds face redemptions, “that high yield stuff just doesn’t trade,” Grey said.

Grey said it’s possible for Easterly’s situation to spill over to other funds. “When there’s a panic, the entire asset class, the entire category, will be impacted,” he said.

An annual report noted more than half of the fund was held in 144A private transactions, which is a large concentration in those types of privately placed illiquid securities, noted Anthony Tanner, a former Rochester Fund Municipals strategy manager.

“There were unique aspects to the construction and structure of the fund that resulted in the NAV drop, and the holdings that were impacted,” said Tanner, who added he does not expect the selloff to spread across the market.

Just under 84% of Easterly’s portfolio is made up of credits rated D to BB-plus, according to its first quarter fact sheet.  The fund held many project finance deals that rely on single revenue streams with minimal collateral and financial information, which is often hidden in data rooms accessible only to holders who may not have an interest in making the information public.

That lack of credit transparency contributes to the problem, said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.

With some of this “high yield chase,” market participants might start to dissect credit a little better and maybe not take things at face value, Olsan said.

“It is effective where you do have to do your credit work and pay attention,” she said. People can “get a little lax with how a credit is being looked at” when hunting for yield, she said.

Far from leading to panicked selling, the Easterly fire sale may represent a good buying opportunity for some portfolio managers, Nguyen said.

“This could probably turn out to be an opportunity for a lot of the other funds,” he said.

Kathie O’Donnell contributed to this report.