Dec 21, 2015 | Post by: Roman Chuyan, CFA Comments Off on HY Debacle: An Update

HY Debacle: An Update

The high-yield bond debacle has continued since I covered it here. To recap briefly, “the current HY prices and spreads, 6.4% for the HY index overall and 4.08% for BB, suggest considerable stress that typically occurs during a credit contraction.” The HY bond market deteriorated further since then:

  • The HY index spread has now risen above 7%, to 7.2% at the time of writing (see chart above), from 6.4% on Nov 30th. The spreads for lowest-quality CCC tier now exceeds its 2011 peak, at the level last reached in 2001 and 2008.
  • Selling is facing limited liquidity. A notable casualty, the $789-million Third Avenue Credit Fund, announced that it halted redemptions to investors and was placed in liquidation.
  • Kinder Morgan announced a dividend cut in the 2nd week of December, joining Transocean, Chesapeake Energy, and Peabody Energy in cutting or halting dividends to shore up their credit positions.

Historically, ever-optimistic equity managers can continue to bid up stock prices for a long time, despite negative fundamentals. What can stop it is a credit contraction, as “hard-headed” bond managers who are concerned with getting their money back, spoil the equity party. Judging by HY spreads, a credit contraction is now well under way, and appears to start to spill over into the stock market.

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