credit high yield Markets oil

A Junk Odyssey.

Looking across the high yield market amid the post-holiday malaise.

It’s the Friday after Thanksgiving, which means there are very real questions about how engaged everybody is, given that most of you are probably nauseous from chugging cheap table wine while pretending to be interested in making small talk with relatives you only see once a year.

Markets probably would have coasted aimlessly into the weekend, allowing folks to disengage and cure their hangovers by getting drunk again (only this time on actual liquor now that the in-laws and their screaming children are gone) were it not for two stories that demanded attention.

The first was a Wall Street Journal report out late Thursday that detailed a U.S. government lobbying effort to convince allies not to use telecom equipment from China’s Huawei Technologies. Clearly, that’s bad news for anyone hoping that trade tensions would abate prior to the G20.

The second was obviously crude, which careened lower yet again, marking the third session in two weeks during which prices have plunged.

Neither of those two narratives bode well for risk assets, which is why it comes as no surprise that high yield is under pressure again. Junk bonds logged their first positive session since early this month on Wednesday, but the respite looks like it’s going to be short-lived.

Friday morning, as oil plunged, the CDX HY index dove to a new two-year low. It rose on Wednesday for the first time in ten sessions (see bottom pane in the following visual marking the 9-day losing streak).



In the same vein (all of this is just different ways of looking at the same thing), take a second to appreciate the fact that HY spreads have blown out some 100bps since October (top pane below also shows CDX spreads which are a bit tighter, a reflection of superior liquidity versus the cash market). That stretch has of course been accompanied by a selloff in mom and pop’s favorite liquidity-mismatched high yield ETF (bottom pane below).



On the bright side, it looks like HYG is holding up ok in terms of structural integrity. Below is an NAV premium/discount study (middle pane) with inflows/outflows (bottom pane).



While there are some signs of stress in the purple box, there are also closes at a premium and intermittent inflows. So while Adam Schwartz might be racking up some gains on his puts, it looks like he might have to wait around a little longer on the epic implosion he swears is coming.

Read more

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