High-yield markets quickly moved toward “the point of no return” over the past week as investors shunned risky debt, according to Bank of America research.
“The current pace of events is unsustainable,” the bank’s credit strategists said in a research note Friday. They said the point of no return is “where the turn in the credit cycle becomes inevitable and irreversible, as funding sources dry up, issuers face liquidity crunch, credit losses rise, investors rush for the exit, and face extremely thin liquidity on the way out.”
High-yield spreads reached 742 basis points on Thursday, after widening 237 basis points in just the last week. In previous cycles, it took at least seven months for spreads to reach similar levels, according to the report.
“This time around the move occurred in two months,” the credit strategists said. “There is no historical precedent for this.”
The coronavirus has shaken markets globally, keeping risky borrowers from accessing capital.
“Corporate credit funding markets have frozen in recent sessions, which is an expected outcome given the extreme levels of volatility,” according to the report. “While the consequences of their temporary closure should not be exaggerated, the question still comes down to how long could they stay closed for before inflicting damage.”
Trading in high-yield debt markets has become difficult over the past week, with bid-ask spreads widening, one debt investor told Institutional Investor in a phone interview Friday. As markets rallied Friday morning, he said investors rushed to get things done as trading — at least temporarily — became easier.
Intuitional investors are using pockets of opportunity to sell off riskier assets, according to the high-yield debt manager. He said trading is still expensive and that he is “hoarding cash.”
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While the speed of the downward spiral in debt markets has been alarming over the past week, Bank of America’s strategists still favor their “base-case that the current volatility episode has not yet grown to the point where cyclical turn narrative becomes inevitable and irreversible.”
They pointed to progress made in fighting the virus in China and South Korea, suggesting “strong restraining measures” could change the trajectory of new infections within weeks.
“There is still time to break the back of the virus and avoid a recession,” the strategists said.