The prices of debt issued by commodity and raw material producers have crashed and their debt has been downgraded by the ratings agencies. The margin call is rippling; the yield spread between junk bonds and US Treasury benchmarks has widened for all issuers. Last week a junk mutual fund and a junk hedge fund, faced with mounting losses and customer withdrawals, refused to honor further redemption requests for an indefinite time period. They cited fire sale prices for junk debt and illiquidity: the failure of the market to provide deep enough bids for them to unload their positions. However, the liquidity they were counting on is funded by debt. When debt contracts, that pool gets shallower and eventually evaporates, usually just when sellers are stampeding to get out.

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