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UPDATE 3-US credit markets hammered in sell-off
June 20, 2013 / 5:09 PM / 4 years ago

UPDATE 3-US credit markets hammered in sell-off

(ADDS updated figures for high yield, EM)

By John Balassi

New York, June 20 - US credit markets were hammered on Thursday in the global sell-off, with major central banks seeming to have little ability to control the rush of volatility and the perception of increased risk in most assets outside of the US dollar.

A ghastly day for the markets got even worse in the afternoon following a report that the IMF was preparing to suspend aid payments to Greece over what it said was a shortfall of EUR3bn-4bn.

This reopening of risk concern about Europe helped send the Dow down 350 points and the CBOE Volatility Index up 23% to 20.47 - its highest reading in 2013.

Investment-grade bonds were crushed in secondary trading as jittery investors, spooked by Fed Chairman Ben Bernanke’s remarks about ending quantitative easing as well as a worrying spike in a key China lending rate, sold off virtually anything connected to risk. Yields in the benchmark 10-year Treasury have soared 23bp in the last two days, up to 2.341% by late afternoon Thursday.

CDX IG20 spreads have widened 10bp since yesterday, and the iShares iBoxx $ Investment Corporate Bond Fund, a popular exchange-traded fund, has lost 2.5% to hit a 14-month low.

“We’re walking into a mess,” a banker at a major Wall Street firm told IFR. “There’s carnage all over the Street.”

In what may have been the most troubling development, China’s overnight repo rate - the interest rate for interbank lending, which is crucial to keep the markets liquid - spiked to a whopping 25%, a level reminiscent of the credit market freeze right before the collapse of Lehman Brothers and AIG that kicked off the last global financial crisis in earnest.

That sent credit default swaps (CDS) on China sovereign debt - essentially insurance bought against a potential Chinese default - massively wider. China’s 5-year CDS blew out 33bp to 133bp, in a clear sign of market concern over the severe stress in the interbank market of the world’s second-largest economy.

Adding to woes in Asia, China’s manufacturing activity reading fell to a nine-month low in June, significantly worse than expectations. As a result, the metals and mining sector is leading the weakness among recent corporate bond issues, which are getting battered in the secondary market. The new Rio Tinto 2.25% 2018s were trading at +140bp, 10bp wider from last Friday’s pricing.

Among other recent issues, Georgia Pacific 3.734% 2023s were bid at +165bp after pricing at 155bp over Treasuries, Boston Properties 3.8% 2024s were quoted at T+168bp (priced T+165bp), and Agilent Technologies 3.875% 2023s were quoted at +196bp (priced T+175bp).

The turmoil also brought new issuance to a halt in both investment-grade and junk bonds, with investors and issuers alike wary of the rapidly rising Treasury yields.

“I think that this will mark a huge change in the environment for new issuance, especially in the more aggressive sectors like high-yield where liquidity is drying up pretty rapidly,” said an investor at a wealth management firm.

One bright spot seemed to be in shorter duration bonds, as the 5-year corporate tranche is being viewed as relatively safe due to the Treasury curve flattening. The new Mylan 2.6% 2018s were quoted tighter at +155bp, after pricing at160bp over Treasuries.

But elsewhere, risky assets have been pummeled.

In the high-yield space, sources reported a sharp increase in bid-wanted in competition lists (BWICs) making the rounds as Double B rated names fell by several points.

“A lot of names with duration are down three to four points, and even some without duration are down in sympathy,” said a trader.

Wednesday’s USD300m 9% 2021 deal from wealth management advisor NFP fell below its par new issue price, having risen more than a point initially. Bonds from high-yield names Sprint and Dish surrendered gains made after Dish said late Tuesday it was abandoning a bid for Sprint.

“The US is definitely suffering more than Europe, where there is definitely less chance of steep interest rate rises,” one European banker said.

“In Europe, there seems to be more index-hedging. But in the US, there is more of a feel that there is just outright selling.”

Emerging market bonds, which have been key beneficiaries of the Federal Reserve’s loose monetary policy, were also hit hard.

Russia’s 2042s fell a full 5 points on the cash price, sending spreads about 33bp wider. Turkey’s 2041s lost 6 points, while Hungary’s 2023s were down 4 points.

In Latin America, Brazil 2023s fell 3.75 points, Mexico 2022s lost 2.75 points and Venezuela 2022s lost 3.50 points.

“We remain in an environment where currencies and fixed income are forced to adjust to a new, less favorable financing environment,” said Gillian Edgeworth, an economist at UniCredit.

U.S. Treasuries..........

U.S. Treasury outlook...

U.S. corporate bonds....

U.S. agencies...........

U.S. mortgage-backeds...

U.S. asset-backeds......

U.S. municipal bonds...

Reporting by John Balassi; Additional reporting by the IFR team; Editing by Marc Carnegie

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