Junk Bond Sell-Off Deepens With Energy Hit the Hardest By Virus
Comment of the Day

February 27 2020

Commentary by Eoin Treacy

Junk Bond Sell-Off Deepens With Energy Hit the Hardest By Virus

This article by Paula Seligson for Bloomberg may be of interest to subscribers. Here is a section:

Energy led the decliners as oil prices fell below $47 a barrel, while bonds of rental car Hertz Global Holdings Inc. slumped as much as six cents on the dollar. Leveraged loans tied to American Airlines Group Inc. and Travelport Worldwide Ltd. also slipped. The high-yield CDX index, which trades on price, was down a full point at one stage.

High-yield bond investors are trying to assess the big unknown: whether the coronavirus will be just a short-term problem if it can be contained, or, far worse, turn into a pandemic that could pose a long-term drag on the economy and spark a recession.

“The sell-off is accelerating,” said William Smith, a portfolio manager at AllianceBernstein. “Initially we were seeing more weakness in liquid securities, but today there are multiple situations where bonds are down more than five points.”

Eoin Treacy's view

Riskier credits are less well able to ride out earnings volatility than better capitalised companies. That’s generally why they need to discount their bond offerings. Spreads in the sector were priced for near perfection heading into the end of 2019 as the stock market continued to rebound following the provision of $400 billion in stimulus to the repo market. The potential knock-on effect to demand for consumer products resulting from the virus scare is an obvious risk.

The iShares iBoxx High yield Corporate Bond ETF pulled back sharply this week to signal a peak of at least near-term significance.

High yield energy spreads continue to lead the market higher. The low price of oil, with West Texas Intermediate coming back down to test the 2016 through 2018 lows, suggests strife for highly leveraged frackers. It is quite likely we are going to see bankruptcies in the unconventional energy sector before a meaningful low for oil prices is found. The sector is also likely to weigh on the wider high yield sector.

Generally speaking, high yield spreads of more than 500 basis points have been associated with significant corrections in the stock market.

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