Global Credit Market Turmoil Rips From Australia to U.S. Munis

(Bloomberg) -- The fallout from the worst rout in credit markets since the global financial crisis is spreading, threatening everything from mortgage debt in Australia to local government bond markets in the U.S.

As the deadly coronavirus pandemic brought more grim headlines Wednesday, risk gauges in the U.S. and Europe pushed out further in another volatile session. The crisis has also closed in on Japan’s $650 billion local credit market, which had been an oasis of calm.

In the U.S., even the $3.9 trillion state and local government bond market, which usually functions as a haven, has seen yields surge as investors pull out their cash, triggering waves of forced selling by fund managers who need to raise money. That has saddled investors with their biggest losses since 1987 and effectively locked states and cities at least temporarily out of the bond market, with all the big sales planned for this week on hold.

Treasuries and other sovereign bond yields have marched higher ahead of trillions of dollars in expected stimulus globally. The U.S. Senate passed a second major relief bill, separate from an additional economic rescue package that President Donald Trump’s administration estimates will cost $1.3 trillion. The European Central Bank launched an extra emergency bond-buying program worth 750 billion euros ($820 billion) to calm the worsening financial crisis.

“You can’t buy risk,” said Mark Nash, head of fixed income at Merian Global Investors in London. “We need easier financial conditions and some virus light at the end of the tunnel, and we are seeing neither at the moment.”

U.S.

CDX is approaching financial crisis levels as traders weigh the efficacy of fiscal and monetary stimulus to counter the effect of the coronavirus. That kept borrowers at bay, a stark contrast to Tuesday’s onslaught.

• Investment-grade bond spreads rose 30 basis points to 285 basis points, the widest level since July 2009, while high yield widened 58 basis points to 904 basis points
• Yields on top-rated 10-year municipal bonds have more than doubled since March 9 to 1.86%, according to Bloomberg’s benchmark index. For debt that’s due in three months -- which is among the easiest for fund managers to sell in a hurry -- the yields have more than tripled to 1.6%
• JetBlue was cut one notch to BB- by S&P and may still be cut further, while Delta’s bonds fell
• Mallinckrodt failed to line up funding for a loan deal designed to ease its debt load and help settle massive legal claims tied to its alleged role in the nation’s opioid crisis
• Moody’s followed S&P in downgrading Hertz, cutting the company one level to B3, with a negative outlook
• Moody’s also cut Occidental Petroleum Corp.’s credit rating cut to junk, saying its purchase of Anadarko “continues to burden the company’s balance sheet”
• The leveraged loan market has plunged to levels not seen since the financial crisis, signaling higher default rates and a potential funding crunch ahead
• There’s still plenty of pent-up issuance in the investment-grade market, where borrowers have come forward opportunistically mostly to refinance commercial paper and other debt
• U.S. investment-grade bonds in the aircraft leasing industry are trading at distressed levels
• The front-end is especially feeling the pain, as pressure builds on companies to meet near-term obligations. Just 72% of short-dated debt now trades above par, versus 99% 10 days ago, according to Deutsche Bank strategist Craig Nicol
• Oaktree Capital Management is planning a new distressed debt fund, co-founder Howard Marks said in a note to clients
• Here’s how cash-hungry companies could bite $700 billion out of banks

Europe

• France’s financial regulators helped banks including Societe Generale and Credit Agricole respond to the growing coronavirus crisis by eliminating a key capital requirement to keep credit flowing

• Italy’s Prime Minister Giuseppe Conte has proposed joint EU debt issuance, with German chancellor Angela Merkel saying she’s happy for her finance chief to explore the proposal with other ministers

  • While joint EU debt remained a taboo for Germany even at the height of the financial crisis after 2008, Merkel said there are “no conclusions” at this stage
• Poland and the Czech Republic both announced fiscal stimulus packages aimed at shielding their economies from the impact of the virus. They offered holidays in debt repayments, loan guarantees and co-financing of workers’ wages
• The doors to Europe’s primary bond market slammed shut again on Wednesday, after a trio of borrowers attempted to get deals done a day earlier with mixed success. Toronto Dominion bank halted a sale of pound-denominated covered bonds, citing “adverse market conditions,” while Royal Bank of Canada failed to tighten pricing on a euro-denominated sale of covered notes
• Regular primary sales will only resume once virus-fueled volatility comes to an end, according to market participants interviewed by Bloomberg News, yet they have no idea when this might be
• Measures of credit risk are climbing, with default swaps protecting high-grade European firms jumping as much as 10% today to the highest since June 2013
• Euro IG bond spreads ended Wednesday at 231 bps
• Citigroup has more than doubled its forecasts for euro investment-grade and high-yield bond spreads this year; it now sees euro IG spreads versus swaps at 140 bps, and euro HY spreads ending the year above 600 bps

Asia

• Global airlines have $29 billion of outstanding debt coming due by the end of the year, with most coming from China Southern and China Eastern
• Spreads on Asian dollar bonds were 5-15 basis points wider, according to traders. That leaves them at their highest in about a decade, according to a Bloomberg Barclays index
• The Markit iTraxx Asia ex-Japan index of credit-default swaps was indicated about 2 basis points wider, according to trader prices
• In Australia, the mortgage-backed security market is “effectively closed” as yields on senior bank debt are up as much as 160 basis points in two weeks, according to Robert Camilleri, co-founder and head of structured credit at Realm Investment House
• In Japan, S&P cut its outlook on SoftBank to negative late Tuesday, citing the broad market declines and the conglomerate’s plans for a share buyback
• In India, the extra yield investors demand to own three-year top-rated corporate bonds over sovereign notes has jumped to a more than four-month high of 109 basis points. Here’s a chart showing that:

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