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Lurching high-yield spreads show a broken market

The sharp sell-off in credit in December and rapid recovery in the first quarter is a worrying sign of market dysfunction.


Euromoney spent the last month talking to the people running markets businesses at many of the world’s largest banks. It’s intriguing to learn what they are not particularly worried about – the threat from new technology, the prospect of disintermediation, the deteriorating macroeconomic backdrop, finding buyers for financial assets. They know they can acquire the best fintechs; they retain a lock on bringing issuers and investors together and slowing growth is not recession, even if geopolitics is jumpy.

It’s depressing to hear what they are worried about, though. Time and again it is chronic illiquidity in credit markets that tops the list. This has been a problem hiding in plain sight since 2013. QE infinity has obscured it, but for how much longer?

UBS in its recent study “Market Liquidity: The real credit fear factor” points to the recent price action in high-yield bonds. In the fourth quarter of 2018, US and European high-yield bond spreads widened 210 basis points and 184bp respectively. In the first quarter this year, they snapped back 132bp and 133bp.

These are top percentile quarterly moves, happening rapidly and for no apparent reasons.

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