WWRR Vol.2.017

Christopher Wood christopher.wood@clsa.com +852 2600 8516
If the potential systemic risk in America is “credit”, it is also the case that 2018 ended with credit
markets beginning to price these risks. Spreads on triple-B corporate bond yield over US Treasuries
have risen by 62bps since early October to 193bps. While the spread on US high-yield bonds has
risen by 228bps since early October to 531bps in late December, the highest level since August
2016, and is now 527bps (see Figure 2).
Figure 2
Bloomberg Barclays US corporate bond yield spreads (BBB-rated and High-Yield corporate bonds)
4.0
3.5
3.0
2.5
2.0
1.5
(ppt) BBB-rated High-Yield (RHS) (ppt)
9
8
7
6
5
4
3
1.0
2
Jan 11
Jul 11
Jan 12
Jul 12
Jan 13
Jul 13
Jan 14
Jul 14
Jan 15
Jul 15
Jan 16
Jul 16
Jan 17
Jul 17
Jan 18
Jul 18
Jan 19
Source: Bloomberg
Also the price of the S&P/LSTA Leveraged Loan Index has now declined to its lowest level since July
2016, though the long-term chart still shows there is a lot of room for a further fall (see Figure 3).
GREED & fear continues to recommend hedging equity portfolios by shorting this index, as well as
Eurozone corporate credit spreads. The Eurozone investment-grade and high yield corporate bond
spreads have risen by 82bps and 257bps from their lows reached in early 2018 (see Figure 4). The
past year also ended with reports of credit markets tightening up as it suddenly became difficult, if
not impossible, to finance high-yield bonds or leveraged loans. Thus, there was seemingly not a
single high-yield financing by a US corporate in December. The last month this was the case was
November 2008.
Figure 3
S&P/LSTA Leveraged Loan Price Index
105
100
95
90
85
80
75
S&P/LSTA Leveraged Loan Price Index
70
65
60
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Source: Bloomberg
Thursday, 3 January 2019 Page 2