Flash crashes frequent at valuation peaks—Is the U.S. bond market once again tasting the flavor of the “subprime crisis”?

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The U.S. credit market is experiencing a series of unsettling bond flash crashes. From luxury retailer Saks to natural gas company New Fortress Energy, as well as subprime auto lender Tricolor Holdings and auto parts supplier First Brands Group, these bonds have plunged from par value to just a few cents within days or weeks—a drop of over 60%.

According to media analysis on Monday, the speed of these crashes is unusually fast and Wall Street is starting to worry: in a market rife with bubbles and investors' blind optimism, such extreme meltdowns may have become the new normal.

Jason Mudrick, of the distressed debt hedge fund Mudrick Capital Management, stated, “These recent crashes may be the canary in the coal mine.”

Although overall credit market returns remain robust—the Bloomberg Global Investment Grade Debt Index has returned 9.3% this year—these cases reveal deep structural problems in the market. In an ultra-low interest rate environment, investors gave up long-held creditor protections just to gain a few extra basis points in yield.

The latest cases show that top Wall Street institutions including Morgan Stanley are urgently pulling out after being hit by First Brands, highlighting intensifying concern about hidden risks among investors.

Crash Mode: Similar Trajectories from Saks to First Brands

Several bond crashes since this spring have shown remarkable similarities. Luxury retailer Saks restructured its bonds after paying just one interest payment, with its bond price dropping from 80 cents in March to under 40 cents in May. New Fortress Energy’s bonds subsequently plummeted, and subprime auto lender Tricolor Holdings filed for bankruptcy abruptly, wiping out almost all some of its debt.

Jonathan Barzideh, co-head of opportunistic credit at Canyon Partners, compared this phenomenon to the “Wile E. Coyote moment”—in Warner Bros. cartoons, the impatient coyote runs off a cliff but only falls after looking down. When no one examines bond fundamentals in the market, prices stay near par until problems surface—"then everyone grabs a magnifying glass."

Though these crashes differ in type—the kinds of debt and direct causes vary—they share key traits: extremely fast speed and lack of warning signs. Investors have begun privately scrutinizing the bonds and loans in their portfolios, seeking signals of risk that may have been overlooked.

Structural Flaws: The Hidden Risks of Loose Covenants

For years under near-zero interest rates, return-hungry debt investors easily gave up protective covenants for a few extra basis points of yield, setting up today’s problems. These so-called “liability management exercises” were almost impossible to pull off more than a decade ago.

Scott Caraher, head of senior loans at Nuveen, said that loose credit agreements “are why we’re stuck in this new regime.” Because investor demand is too high, companies are unlikely to soon offer stronger protections—"because investors aren’t even demanding them."

The Saks case clearly demonstrated this issue. The company’s bonds lacked key protection against new lenders jumping ahead in payment priority, ultimately allowing Saks to strike a backroom deal with a handful of major creditors and, via an August bond exchange, relegate other investors to a lower rung in the payment hierarchy.

Due Diligence Dilemma: Private Companies’ “Black Boxes”

The credit market has grown increasingly opaque over the past decade, making due diligence ever more difficult. Both Tricolor and First Brands are private companies, escaping most of the scrutiny ordinarily faced by public companies.

First Brands’ situation is especially extreme. Over a decade, companies including Millennium Management and UBS-affiliated funds provided over $10 billion to the auto parts supplier, despite outsiders knowing little about its business, funding model, or CEO. Some even called the company a “black box.”

Anton Posner, CEO of supply chain logistics company Mercury Resources, said Wall Street never should have financed this company—they did not dig deep enough on due diligence and didn’t even understand its business model.

Tricolor’s business model is similarly hard to discern. The company not only loans for car purchases, but also collects repayments, repossesses defaulted vehicles, refurbishes and resells them—an end-to-end model that leaves outsiders almost unable to determine its financial condition. Nevertheless, investors in the past five years purchased over $2 billion in Tricolor asset-backed bonds.

Market Warning: A Prelude to the Bubble Bursting?

Although these crashes have yet to significantly impact overall credit market returns, they could signal a larger adjustment is coming. LSEG Lipper estimates investors have poured about $75 billion this year into U.S. high-yield, leveraged loan, and investment-grade debt funds, creating a steady source of demand pushing up bond and loan prices.

Dan Zwirn, CEO of multi-strategy investment firm Arena Investors, stated that these things are heavily overcapitalized. The debt market is part of the biggest bubble in history, and when that bubble is punctured, there will be shocks in the system.

Jason Mudrick believes market “excesses” built up over years of near-zero benchmark rates and steady growth have spurred too much corporate borrowing and encouraged lenders’ aggressive risk-taking. Now we are starting to see this overturn in extreme cases.

Matt King, founder and global market strategist at Satori Insights, noted: “Arguably, there are many credits that should have gone bankrupt, but because of covenant relaxation and ample ongoing liquidity, they are still operating. The only question is how long it will take for these problems to be exposed.”

Risk Warning and DisclaimerThe market has risks; investment needs to be cautious. This article does not constitute personal investment advice, nor does it take into account the individual investment objectives, financial situations, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are appropriate to their specific circumstances. Investing based on this is at your own risk. ```