WDR Waddell and Reed Financial

Investors retreated from the U.S. junk-bond market for the third straight trading day and stocks of large asset managers were hit by heavy selling, a sign that the deepest turmoil in financial markets since summer is intensifying.

Some investors reported difficulties selling lower-rated bonds quickly or at listed prices, though others said the market appeared to stabilize somewhat after the record plunge in prices on Friday.

While the market for the highest-quality bonds remains intact, there are signs across Wall Street that investors are losing confidence in lower-quality bonds and the firms that most actively deal in them.

Waddell & Reed Financial Inc., which manages the $6.2 billion Ivy High Income Fund that has suffered the largest outflows this year of any junk-bond fund, tumbled 7.5%. AllianceBernstein Holding LP, which runs the $5.8 billion AB High Income Advisor fund, dropped 7%.

Affiliated Managers Group Inc., a major investor in Third Avenue Management LLC, which last week suspended withdrawals at its junk-bond fund, dropped 5.7%.

"Investors are nervous about how they should model earnings and if assets of these firms are as sticky as they thought," said Anton Schutz, president of Mendon Capital Advisors Corp., who manages $700 million in investments.

Other asset-management firms including BlackRock Inc.—the world's largest money manager by assets—Invesco Ltd., and Eaton Vance Corp. also declined on a day in which the Dow Jones Industrial Average rose 103.29 points, or 0.6%, to 17368.50.

Stocks and high-yield bonds typically move in the same direction. But on Monday, as stocks rose, the iShares iBoxx $ High Yield Corporate Bond exchange-traded fund, the largest junk-bond ETF by assets, fell 0.9% Monday, to $78.83 a share.

Debt from energy companies dropped more than the broader market, and prices on bonds from firms including Chesapeake Energy Corp. declined significantly. Trading was smoother in higher-rated firms such as Microsoft Corp., with declines largely matching a retreat in U.S. Treasury prices.

Several senior Wall Street executives said they were watching closely for signs the junk-bond tumult would spread to other funds and other markets. By Monday afternoon, they said they remained confident a full-blown credit crunch wasn't imminent, saying the worst selling was largely confined to the debt of the lowest-quality borrowers.

Still, analysts said both share-price action and flows into and out of junk-bond mutual funds would likely provide a better read in coming days on how serious the deterioration of confidence is.

​"It's very ugly," said Aaron Izenstark, chief investment officer at Iron Financial LLC. "All you see in the press is high yield taking it on the chin."

Meanwhile, concerns over the U.S. junk-bond rout spilled over to Europe, where investors fear forced selling could lead to a wider market rout. The cost of insuring against a default on $10 million of European high-yield bonds for five years rose to a two-month high of $360,000 a year on Monday, according to Markit, up from $339,000 on Friday and $294,000 a week ago.

"Previously, Europe was viewed as a safe haven and recently we've seen that change," said Saul Doctor, a strategist at J.P. Morgan Chase & Co.

However, investors have been able to take comfort from low default rates. The default rate on European high-yield bonds during the prior 12 months was 0.3% at the end of September, according to Fitch Ratings, its latest available data. By contrast, more than $5.5 billion of December defaults in the U.S. have pushed the rate to 3.3% in that market, Fitch said Monday.

In the U.S., representatives for retail brokerages run by Bank of America Corp.'s Merrill Lynch, Morgan Stanley and Raymond James Financial Inc. have been calling fixed-income fund managers since Thursday afternoon to ask about liquidity in their funds, or the ability to easily buy or sell at stated prices, 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.

Chicago fund manager Driehaus Capital Management LLC sent a note to wealth advisers in response to the Third Avenue fund liquidation, arguing that it wasn't a seminal event in the market akin to the collapse of Bear Stearns's mortgage-backed hedge funds in 2007.

On Friday, clients pulled $97.4 million in assets from a credit fund run by Avenue Capital Group, sending total withdrawals to $943.3 million for all of 2015, according to fund-research firm Morningstar Inc. Assets dropped to $884.32 million as of Dec. 8 as compared with $2.01 billion at the end of last year, according to Morningstar.

Avenue Capital was founded two decades ago by billionaire hedge-fund manager Marc Lasry and sister Sonia Gardner. The Avenue Credit Strategies Fund was launched in 2012 and is managed by Jeffrey Gary, a former portfolio manager at Third Avenue Management and BlackRock. Avenue Capital and Third Avenue Management aren't affiliated.

Despite the losses, Avenue Capital won't take steps to block investors from withdrawing money from its credit mutual fund, according to someone close to the matter. The firm has told its investors that the downdraft is a buying opportunity. Avenue Credit Strategies is down 6.6% year to date.

Investors have also been pulling money this year from Waddell & Reed's Ivy High Income Fund.

They withdrew $1.8 billion from the fund this year through November, the highest level of any high-yield bond fund during that period, Morningstar said.

The firm has also suffered significant outflows from its flagship Ivy Asset Strategy Fund, a fund that can buy stocks, bonds commodities and currencies, which has lost 8.1% this year, according to Morningstar. The fund has shrunk by about one-third this year to $17.5 billion, and investors pulled out $1.2 billion in November, the third-largest monthly outflow in the fund's 30-year history.

In recent months, fixed-income traders said they have seen several larger, less-liquid securities on the market that appear to be tied to Ivy, suggesting that managers at the fund have tried to liquidate positions in some securities. One trader said it has been a struggle for managers looking to sell riskier assets as buyers have been scarce.

The Ivy High Income Fund is among the worst high-yield performers this year, according to Morningstar. The fund is down 6.4% this year through Friday. The high-yield bond-fund category is down 3.8% this year through Friday, according to Morningstar.

Waddell & Reed said Monday that the Ivy funds' high-income portfolios are "not distressed credit funds." A spokesman declined to comment on the firm's stock price.

Daniel Ivascyn, Pacific Investment Management Co.'s group chief investment officer, said that over the past year the firm has held more cash and is increasingly using more liquid options and indexes to gain credit-market exposure, rather than buying individual securities.

With the Federal Reserve set to make its decision on Wednesday about whether to raise interest rates, "You have the ingredients for a pretty volatile year-end," Mr. Ivascyn said.

Justin Baer, Matt Wirz and Gregory Zuckerman contributed to this article.

Write to Sarah Krouse at sarah.krouse@wsj.com, Kirsten Grind at kirsten.grind@wsj.com and Mike Cherney at mike.cherney@wsj.com

(END) Dow Jones Newswires

December 15, 2015 02:45 ET (07:45 GMT)

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