High yield is in trouble, ladies and gentlemen.
Monday’s epic collapse in crude prices presages all manner of pain for junk bonds and especially for anything tied to energy.
The Markit CDX high yield index dove to a four-year low (intraday), sliding the most in more than a decade, as oil stocks appear poised to suffer a historic bloodbath.
“The scariest part about this development? During the 2014/15 oil price decline, energy debt credit spreads blew out to levels that caused distress in the general credit markets”, Kevin Muir wrote in a Sunday evening note. “In essence, the pain in the oil sector crept into financial markets”.
That’s what you may see this week. The infection looks set to spread. And you can take “spread” figuratively and literally, in this case. The spread on CDX.HY ballooned out to nearly 600bps. Behold:
That is what I meant on Sunday night when I delivered the following common sense assessment: “High yield CDS is likely to spike materially [as] collapsing crude will pile pressure on an already fragile-looking credit market and you’d assume junk protection will be in high demand”.
As Bloomberg’s Luke Kawa helpfully pointed out, that is “5.7 sigmas above its three-month mean [and] worse than anything we saw in 2015 or 2018”.
Got that? What you see in the second visual above is a six standard deviation move.
Energy names make up in excess of 11% of the high yield market.