Junk-Bond Rout Deepens, Sending Shockwaves Through Stocks and Other Markets

The action crystallized long-standing fears about the vulnerability of the stock and bond markets to a broad shift in sentiment. The spreads between U.S. junk bonds and Treasury securities have widened sharply over the past week, underscoring investors' sense that the risk of default by companies with high levels of debt is on the rise.

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Representatives for retail brokerages run by Merrill Lynch, Morgan Stanley, and Raymond James Financial Inc. have been calling fixed-income fund managers since Thursday afternoon to ask about the ability of their funds to easily buy and sell securities, known as liquidity, according to people familiar with the matter. Questions have included what percentage of fund assets are illiquid and how that proportion has changed in recent months, the people said.

The iShares ETF was trading Friday at a discount to the value of the fund's underlying holdings, an unusual event that points to market stress, said an ETF trader. Exchange-traded funds hold portfolios of assets, like mutual funds, but trade intraday. The trader said the situation shows that investors were hesitant to buy the ETF, fearing they won't reliably be able to sell the bonds without accepting large discounts, a concern that has loomed over markets since ETFs became popular over the past decade.