Coronavirus | Credit markets floundering

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Coronavirus | Credit markets floundering

- Strong stocks have lately sent them into a tear in recent weeks. However, in the emerging credit markets - and its wider implications - it becomes clearer that coronavirus is a persistent threat to the economy.

Less than a month into the tightest spreads of post-financial crisis era, risk premium for special bond are climbing once again. Bonds of companies hurting most by shutdowns sold off, including Staples Inc. and American Airlines Group Inc. The amount of distressed debt has even started to creep up, though defaults remain far below levels seen in the pandemic earlier in the year.

Market watchers are divided on what it all means. Some, like the Aristotle Credit Partners' Douglas Lopez, say it is an overdue correction.

'The market got ahead of itself in the pricing in the reopening trade and continuing economic strength, especially in low quality and cyclical names where profitability is the most sensitive to this changed outlook, Lopez said.

Yet others, including Amundi US's Ken Monaghan, are not so sure.

What we're seeing right now is a temporary phenomenon that affects the markets having some questions about the delta variant and what its impact will be between now and the end of the year, said Monaghan, a portfolio manager whose firm oversees more than $90 billion.

He expects the softness of credit markets to be very thin as more people in the U.S. get vaccinated. 'There is a very good chance that higher yield spreads will revisit lower levels which they had seen earlier this year, Monaghan added.

The average spread on junk-rated bonds hit a low of 2.62 percentage points on July 6, a level not seen since 2007 and has mostly widened since, according to Bloomberg Barclays Index data.

The difference in spreads between single-B rated companies - considered the safer junk bonds - and those rated a tier lower, or double-B, has also widened significantly. The gap grew 26 basis points over the past month, the most since February. Investors who piled into CCC-rated bonds, the riskiest tier of bonds, lost money last month for the first time in more than a year, reflecting the increased risk of buying lower-quality bonds, which are more likely to be disrupted by any delay to the economic recovery.

The market tightened up Friday and spreads firmed up for the first time in a week. Labor Department employees added the most jobs in nearly a year, according to a report by the U.S. government. But companies such as BlackRock Inc. and Wells Fargo Co. are delaying their return-to-office plans, calling into question just how quickly things will start to get back to normal.

Worsening sentiment is already impacting the ability of companies to tap markets at the terms they want. Multiple leveraged loans have had to increase - or lower flex' their pricing in recent days, including a high-profile dividend deal by Standard Industries Holdings Inc. and a term loan from the auction house Sotheby's.

These wobbles in the debt markets caused the amount of distressed bonds and loans to rise to about $72.5 billion as of Aug. 4, a nearly 25% jump over the one-year low of about $58 billion reached in early June, according to Bloomberg data compiled for that moment. Even certain bonds of day-trader favorite AMC Entertainment Holdings Inc. are once again trading at spreads of more than 10 percentage points, though those spreads remain well below their highs of the past year.

If the credit markets fail, check out this week's brief: Credit Markets Show Signals of Cracking In 2007!

Some say that the increasing credit stress in China, the second largest U.S. dollar market in the world, is also weighing heavily. Investors grappled with the fallout from the property developer China Evergrande Group, the world's most indebted developer, as it struggles to reassure money managers that it can make good on its debts. China's escalating crackdown on industries from technology to education has also made investors nervous.

Despite the recent jump in troubled debt, large filings remain slow, helped by accommodative Federal Reserve policies that have allowed all but the riskiest companies to shore up their cash reserves. The rate of high-yield bond defaults could fall as low as 1% by year-end, a mark not seen since 2013 from Fitch Ratings said last month.

Still, the recent tumult could signal more credit weakness ahead.

'Just when people thought the economy was going to be turning back on full steam, it is now hesitating, said Phil Brendel, a distressed debt analyst at Bloomberg Intelligence. 'That clearly can lead to the depletion of cash hoards, and some companies might throw in the towel. No companies launched in the U.S. investment-grade bonds sales releasing on Friday. Estimates for next week stand at $25 billion to $30 billion, dealers say Monday could see borrowers number in the double digits, according to an informal survey of debt underwriters.

Credit spreads are tightening for the second straight day and heading toward a weekly decline, the Markit iTraxx Europe index shows. Commerzbank strategists revised spread targets once again this year, with updated ECB guidance pushing back the timeline for QE tapering.

It's a quiet day in Europe's primary market, which is headed for the eighth zero-sales day of the year. Things will accelerate next week as Dickinson Co. begins calls on Monday about a four-part euro agreementEurope's CLO market continues to be active. After a record month of new business in July, two new contracts have been priced in the region this week. The activity brought volumes for new CLOs in 2009 to 20.7 billion euros - according to data compiled by BloombergNeuberger Berman Europe Ltd. prepared on Thursday the price of the 306.3 million Euro Neuberger Berman Loan Advisers Euro CLO 2 at the € 258.9 - million euro. Triple-A spreads were printed over Euribor at 103 basis points about triple-A spreads:

No issuesrs hired offerings or marketed banks for potential sales on Friday.

The note sales in Asia excluded Japan fell this week from $5.6 billion a week earlier, the lowest issuance since the period ended June 18 according to Bloomberg-compiled data.