"Unprecedented" Global Policy Easing Has Failed To Curtail Credit Carnage

“It’s brutal. We have never seen such a big move in such a short amount of time... This is the quickest and most severe I have ever experienced, and I was around for 2008."

That is how Monica Erickson, a portfolio manager at DoubleLine, describes the carnage across every aspect of the credit markets that has erupted in just the space of the last few weeks.

For higher-risk 'junk' rated companies, the sell-off has been the most severe, with US high yield corporate bond risk topping 1000bps for the first time since 2009:

In fact, all of the credit markets - from investment-grade corporates to off-the-run Treasuries and from leveraged loans to short-dated muni bonds - are all frozen...

As NBF warns "should leveraged loans go bad, that has potential to freeze the corporate bond market and the entire financial system." Well, they are going bad...

Commercial mortgage-backed securities are a bloodbath...

And despite The Fed's muni-focused bailout, yields continue to soar...

Worse still, the systemic risk of the financial system appears to be creaking gravely with LIBOR-OIS spreads - generally considered to be a measure of health of the banking system - blowing out to 2009 highs, as DoubleLine's Erickson notes, "companies are focused on increasing liquidity, drawing down revolvers and accessing cash wherever possible. They are preparing for the worst because we are in an unprecedented environment,” putting massive pressure on bank balance sheets (and implicitly their liquidity needs).

As Anne Van Praagh, a researcher at Moody's, says, "the combined credit effects are unprecedented. This is not like anything we have seen before."

Notably, the credit crash sending yields soaring worldwide has one silver-lining - the global volume of negative-yielding debt (the most irrational insane aspect of current capital markets) is evaporating...

As the volume of negative-yielding corporate bonds disappears:

Source

All of which is why policymakers are in full panic mode to do something about it with an unprecedented 42 rate-cuts since Feb 1st (note that there was only 36 cuts in the two months following Lehman's collapse).

As Bloomberg notes, this week alone has seen 39 interest rate cuts globally, with monetary-policy heavyweights like the Federal Reserve and the Bank of England to more peripheral central banks in Mongolia and Trinidad and Tobago slashing their benchmarks in emergency moves aimed at combating the economic meltdown from the coronavirus pandemic.

The average COVID-19-related rate-cut has been 70bps, sending the global monetary policy rate crashing to record lows...

Many of the central banks went further than lowering borrowing costs - often now at record lows - and activated playbooks from the financial crisis: buying bonds, intervening in currency markets and setting up emergency loan programs for banks and companies.

“The bad news is that as policymakers roll out their responses, the extent of economic damage will be increasingly evident soon,” said Ebrahim Rahbari, Citigroup’s global head of currency analysis.

And if monetary responses were not enough, Fiscal Policy Initiatives from the G7 are growing by the day...

Cutting rates to zero, buying endless amounts of sovereign bonds, and inflationary intervention however does nothing to lower the funding costs of the average corporation as 'credit' risk perceptions are finally starting to creep into reality after years of central-bank-sponsored distortion.

Finally, we note that policymakers' acceleration toward yield curve control, UBI, MMT, and direct industrial intervention (utterly unprecedented inflationary and demand-driven measures in a supply shock) are ultimately, as Daniel Lacalle noted previously, not only a mistake, but they are the recipe for stagflation and guarantees a multi-year negative impact generated by rising debt, weakening productivity, rising inflation in non-replicable goods while deflation creeps into official headlines, and economic stagnation.

All of which may explain why the sovereign credit risk of the USA is starting to rise...