Market Stress Building at the Fastest Pace Since Lehman

(Bloomberg) -- Even before today, financial conditions were tightening at the fastest pace since the 2008 crisis.

Markets buffeted by coronavirus fears were thrown into tumult Monday by the potential of a full-blown oil-price war. The next pain point to watch is in credit, from frozen primary markets to potential blow-ups in leveraged companies. And it’s all happening so fast few can hazard a guess as to how it will play out.

A Bloomberg gauge of financial stress for the U.S. deteriorated more in just 16 days than in the 82-day peak-to-trough move in the last market shake-up in December 2017. A similar measure for the euro zone has tumbled less, but also quite briskly.

The velocity of the U.S. move makes it incomparable to previous routs except the great financial crisis of 2008.

“This is happening at light speed this time, and it’s mostly because of credit spreads widening so much, it’s not about bank liquidity,” said Ira Jersey, chief U.S. interest rates strategist at Bloomberg Intelligence. “We’re pricing in a global recession of some magnitude.”

Risk premiums on U.S. junk bonds, or their yield compared to government bonds, are at the highest levels since July 2016 as global markets gird for another roller coaster week.

Some European stock indexes are set to enter a bear market while the entire U.S. yield curve plunged below 1% for the first time in history.

Dwindling corporate cash flow and sharply higher refinancing costs could feed back into the real economy, according to Pimco. The firm published a note warning that recession in the U.S. and Europe is a “distinct possibility” in the first half.

“The speed of the deterioration is important because of the shock effect, and because it makes forecasting harder,” said Torsten Slok, chief economist at Deutsche Bank Ag in New York. “We’re looking for whether people will be laid off, and if companies can roll over loans.”

While the momentum of the moves echoes Lehman’s collapse a decade ago, key stress metrics don’t put the world in the same kind of maelstrom.

To keep it in perspective, the Ted spread, or the difference between three-month Libor and three-month U.S. T-bills, is still well below its 2018 high. The gap is a widely-used indicator of the risk markets perceive in the global banking system.

Baa rated debt differentials to 10-year Treasuries are still below 2016 levels, despite their ferocious spike in the past few days. The commercial paper versus three-month T-bills spread, however, is closing in on its highest level since 2009.

Some economists see a key test looming at the end of the financial quarter this month.

“That’s when companies need to refinance, they need show cash on balance sheet, to prove they really have funding,” Marc Ostwald, chief economist and global strategist at ADM Investor Services International in London, said in an interview. “That’s when it all becomes much more serious.”

--With assistance from Liz Capo McCormick.

To contact the reporter on this story: Todd White in Madrid at twhite2@bloomberg.net

To contact the editors responsible for this story: Sam Potter at spotter33@bloomberg.net, Cecile Gutscher, Sid Verma

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