Financials: US high yield bond market cracking or fracking?

oil pain

The majority of mainstream commentary has focused on the dramatic fall in the oil price, the share price carnage in energy stocks and a potential boost to consumers. However, the financial sector will be watching developments nervously. Unfortunately, if commodity price forecasts have gone pear-shaped it is increasingly likely that capital ploughed into the sector will face losses.

And that’s a big deal for the US high yield bond market. The shale gas/oil sector has been the recipient of enormous amounts of investment capital in the form of debt. Barclays have provided a striking graphic of the growing proportion of the $1.3 trillion high yield bond market which has been sunk into energy. In the chart below one can see the weighting of energy debt has trebled from circa 5% to 15%!!

Wowzers! That’s close to $200 billion of bonds exposed to the energy sector and the second highest in the entire market after the 18% exposed to telecoms(more on that later!). For context, that $200 billion is approximately half the size of the sub-prime market in 2007. Let’s just say the combination of a cash flow/returns shock, illiquid markets(bank trading desk shrinkage) and highly leveraged exploration vehicles could become rather toxic.



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