What Energy Sector and High Yield Bonds sell-off is telling us?

“Energy sector bonds are bearing the brunt of the damage in high yield in the U.S., where the HYG ETF suffered massive outflows. Bloomberg Intelligence analyst Spencer‧‧‧

“Energy sector bonds are bearing the brunt of the damage in high yield in the U.S., where the HYG ETF suffered massive outflows. Bloomberg Intelligence analyst Spencer Cutter highlights that the share of junk energy bonds trading at distressed prices surged to 35% as of Tuesday, the highest proportion since 2016.

The 2015-16 experience showed it took a while for lenders to cut back, but when they did, it was a key contributor to corporate closures.

“The vast majority of energy-sector bankruptcy filing in the previous downturn occurred around the spring 2016 borrowing-base redetermination process,” adds Cutter.

The more pervasive worry for the junk space may be the speed at which short-term spreads are being repriced. A very interesting chart to watch in 2020 was the gap between short-term borrowing costs for the most creditworthy junk-rated firms compared with those of the U.S. government. This is where concerns about an imminent downturn should become manifest. 

All of a sudden, vigilance on this front is now warranted. While still low by historical standards, BB two-year spreads have widened by more than 80 basis points over the past nine sessions, the briskest such blowout since early 2010. The rate of change may be more important than the outright levels in ascertaining how concerned investors are at present, and how the marginal borrower might be affected as a result”.

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    As an Investment Consultant and Specialist, Pompeo Pontone is a Professional Investor with 25 years’ experience in the fields of Investment Management, Quantitative Finance & Derivatives Trading and Data Science.

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