Energy Bond Crash Contagion Suggests Oil Will Stay Lower For Longer

When we first explained to the public here, that the excessive leverage and currently squeezed cashflow of many US oil producers could "trigger a broader high-yield market default cycle," the world's smartest TV-anchors shrugged off lower oil prices as 'unequivocally good' for all. Now, as a 40% collapse in new well permits and liquidations occurring at the well-head, the world outside of credit markets is starting to comprehend the seriousness of the crash of a sector that was responsible for 93% of jobs created in this 'recovery'.



The credit risk of HY energy corporates has more than doubled to a record 815bps (over risk-free-rates) crushing any hopes of cheap funding/rolling debt loads. Suddenly expectations of 1/3rd of energy firms restructuring is not so crazy...

The chart above suggests another problem for hopers... credit markets - the most sensitive to cashflows at this stage - are signalling either prices have considerably further to fall or will remain at these thinly-profitable-if-at-all prices for considerably longer...

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There is a bigger problem though. As the following chart shows, there is clear 'selling' of high-yield bonds (and some hedging) which has crushed the most-liquid (HYG ETF) instrument for actual yield risk.


In other words, there is contagion and managers are rotating from protection to selling and reducing exposure.


Charts: Bloomberg