Tuesday, November 20, 2018

In Other News: "Credit Spreads Are Blowing Up"

From ZeroHedge, Nov. 19:
For years, it appeared that nothing could shake the relentless bid for US corporate credit, whether in the investment grade space or in junk bonds. In fact, just over a month ago, on October 2, we reported that high yield spread printed the tightest levels seen since the financial crisis.

A lot has changed since then.
As discussed earlier after ignoring the move in stocks, credit spreads have been rocked sharply wider due to a confluence of negative factors ranging from the plunge in stocks and spike in the VIX, escalating trade war concerns, fears about rising rates and deteriorating fundamentals, worries about the end of the US fiscal stimulus, Brexit and Italy’s budget's woes, and last but not least, the recent collapse in GE and PG&E bonds.

In fact, junk bond spreads blew out by the most in almost two years last week, leaving the lowest-quality U.S. companies paying the most for their debt since mid-2016 according to Bloomberg. The yield on the Bloomberg Barclays US Corporate High Yield Total Return Index has risen by over 100 basis points since Oct. 1 to almost 7.2%, the highest since June 2016. The spread on the index widened by 51 bps, its biggest weekly gain since February 2016.

As the chart below from Goldman shows, last week credit had its worst return since the oil price troughed in early 2016.
The repricing was most acute for CCC-rated debt, which after outperforming the rest of the high yield market, saw a sharp, 200 basis point jump in the average yield to about 10.8%...