As valuation peaks, flash crashes occur frequently, and the U.S. bond market tastes the flavor of the "subprime mortgage crisis" again?

The U.S. credit market is experiencing a series of alarming bond flash crashes, from luxury retailer Saks to natural gas company New Fortress Energy, to subprime auto lender Tricolor Holdings and auto parts supplier First Brands Group. These bonds have plummeted from par value to mere cents within days or weeks, with declines exceeding 60%.

According to media reports on Monday, the speed at which these crashes are occurring is extraordinary, and Wall Street is beginning to worry: in a market that is severely bubble-prone and where investors are blindly optimistic, such extreme crashes may have become the new normal.

Jason Mudrick of the poorly performing debt hedge fund Mudrick Capital Management stated, "These recent crashes may be the canary in the coal mine."

Despite the overall credit market still delivering strong returns, with the Bloomberg Global Investment Grade Debt Index returning 9.3% this year, these individual cases expose deep-seated structural issues in the market. Investors have abandoned long-held creditor protection clauses in a super-low interest rate environment, just to gain a few basis points of extra yield.

The latest cases show that top Wall Street institutions, including Morgan Stanley, are urgently withdrawing from First Brands due to the risks involved, highlighting growing investor concerns about hidden risks.

Flash Crash Pattern: Similar Trajectories from Saks to First Brands

Several bond crashes since this spring exhibit striking similarities. Luxury retailer Saks restructured its bonds after paying interest only once, with its bond price dropping from 80 cents in March to less than 40 cents in May. Bonds from natural gas company New Fortress Energy then plummeted, and subprime auto lender Tricolor Holdings suddenly filed for bankruptcy, leading to a near-total loss of some debts.

Jonathan Barzideh, co-head of opportunistic credit at Canyon Partners, likened this phenomenon to a "Wile E. Coyote moment"—in Warner Bros. animation, the impatient coyote runs off a cliff but "only falls when he looks down." When no one in the market is closely examining the fundamentals of the bonds, prices can remain near par value until problems are exposed, "and then everyone pulls out their microscopes."

Although these crashes differ in type—the types of debt sold and the direct causes vary—the common characteristic is their rapid speed and lack of warning. Investors are beginning to privately scrutinize the bonds and loans in their portfolios for potentially overlooked risk signals.

Structural Flaws: The Hidden Dangers of Loose Terms

For years, in an environment close to zero interest rates, yield-hungry debt investors have easily given up protective clauses in exchange for a few basis points of extra yield, laying the groundwork for current problems. These practices, known as "debt management operations," were nearly impossible to implement over a decade ago.

Scott Caraher, senior loan officer at Nuveen, stated that loose credit agreements "are the reason we are trapped in this new regime." Due to excessive investor demand, companies are unlikely to provide stronger protective terms anytime soon, "because investors aren't even asking for them." The Saks case typically illustrates this issue. The company's bonds lack key safeguards to prevent new lenders from jumping to the front of the repayment priority, ultimately allowing Saks to reach behind-the-scenes agreements with a few large creditors, pushing other investors down the repayment ladder through a bond exchange completed in August.

Due Diligence Dilemma: The "Black Box" of Private Companies

The credit market has become increasingly opaque over the past decade, making due diligence increasingly difficult. Both Tricolor and First Brands are private companies, shielded from much of the scrutiny that public companies typically face.

The situation with First Brands is particularly extreme. Over a decade, companies including Millennium Management and funds under UBS Group AG provided more than $10 billion in funding to this auto parts supplier, despite the fact that little is known about its business, financing model, and CEO, leading some to label the company a "black box."

Anton Posner, CEO of supply chain logistics company Mercury Resources, stated that Wall Street should not have provided financing to this company. They did not dig deeply enough in their due diligence and did not even understand its business model.

Tricolor's business model is similarly opaque. The company not only lends for car purchases but also collects repayments, repossesses defaulted vehicles, and resells them after refurbishment, making it nearly impossible for outsiders to ascertain the company's financial health. Nevertheless, investors have purchased over $2 billion in Tricolor asset-backed bonds over the past five years.

Market Warning: Signs of a Bubble Burst?

Although these collapses have not significantly impacted overall credit market returns, they may signal that a larger adjustment is on the horizon. LSEG Lipper estimates that investors have poured about $75 billion into U.S. high-yield, leveraged loan, and investment-grade debt funds this year, creating a stable source of demand that has driven up bond and loan prices.

Dan Zwirn, CEO of multi-strategy investment firm Arena Investors, stated that these assets are severely over-capitalized. The debt market is part of the largest bubble in history, and when the bubble bursts, shocks will occur in the system.

Jason Mudrick believes that the "excessive behavior" accumulated in the market over the years stems from near-zero benchmark interest rates and stable growth, which has stimulated excessive corporate borrowing and encouraged lenders to take aggressive risks, and we are now beginning to see this overturn in extreme cases.

Matt King, founder and global market strategist at Satori Insights, pointed out: "It can be said that many credits should have gone bankrupt, but they have been kept afloat due to a combination of relaxed terms and ample ongoing liquidity. The question is just how long it will take for this to be revealed."