UPDATE 1-US credit markets hammered in global sell-off
(UPDATES throughout with latest levels)
New York, June 20 - US credit markets were hammered on Thursday as the global sell-off continued, 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.
Although Treasuries stabilized around midday by about 3-4bp from the worst levels of the day, investment-grade bonds were still crushed in secondary trading as jittery investors sold off virtually anything connected to risk.
CDX IG20 spreads have widened 9bp since yesterday, when Fed Chairman Ben Bernanke's remarks about scaling back quantitative easing unleashed a wave of selling in markets worldwide.
And the iShares iBoxx $ Investment Corporate Bond Fund, a popular exchange-traded fund, has lost 2.5% in two days to hit a 14-month low.
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 five-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.
"We're walking into a mess," a bond syndicate banker at a major Wall Street firm told IFR. "There's carnage all over the Street."
The turmoil brought new issuance to a halt in both investment-grade and junk bonds, with investors and issuers alike wary of the sharp spike in 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.
Recent high-grade issues, which came to market offering investors relatively little in the way of new issue concessions, were hit especially hard on Thursday morning.
Georgia Pacific 3.734 023s were bid at +168bp after pricing at 155bp over Treasuries, Boston Properties 3.8% 2024s were quoted at T+172bp (priced T+165bp), and Agilent Technologies 3.875% 2023s were quoted at +193bp (priced T+175bp).
The 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.
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 2.5 points, Mexico 2022s lost 2.25 points and Venezuela 2022s lost four 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. Treasury outlook...
U.S. corporate bonds....
U.S. municipal bonds...
(Reporting by John Balassi; Additional reporting by Natalie Harrison and the IFR team; Editing by Marc Carnegie)