Riskiest End of the Junk Bond Market Just Blew Up

Worst one-day hit since the Financial Crisis.

You wouldn’t know by looking at the US Treasury market, which remained relatively sanguine this week, with only a little panic buying on Tuesday. So 10-year Treasuries ended the week near where they’d started it. But at the other end of the spectrum, the riskiest portion of the junk bond market just blew up spectacularly.

There were a lot of culprits to catch the blame. At the top of the list was the devaluation of the Chinese yuan. It caught the corporate bond markets by surprise, though it shouldn’t have, injected all kinds of stress into them, and drove up bond spreads, with investors demanding a higher yields for riskier bonds. It hit the riskiest segment of the junk bond market with a sledge hammer.

Given the precarious state of the current credit bubble and the pandemic nervousness about it, bond investors were rattled by the moves of the People’s Bank of China. In prior crises, such as the 1997 Asian financial crisis and the 2008-2009 Global Financial Crisis, the PBOC had maintained a fixed exchange rate with the dollar. It didn’t devalue, as other countries were doing, to get out of the crisis. The yuan was seen as stabilizing the markets. Now the yuan is seen as destabilizing the markets.

It didn’t help that the Fed’s cacophony has been pointing at a September rate hike. It would be the first ever in the careers of millennials working on Wall Street. It would bring to an end the 30-year bull market in bonds. Even most middle-aged money managers have not yet experienced the alternative, other than a few short-lived dips and panics. On a visceral level, they simply can’t believe rates can ever rise over the long term. To them, rates can only go down.

And oil prices plunged

Originally appeared at: http://davidstockmanscontracorner.com/riskiest-end-of-the-junk-bond-market-just-blew-up/