Oil

The drop in oil was perhaps the 'final straw' for US credit markets, strategist says

Key Points
  • The credit market is sensitive to moves in oil because a "very large portion" of high-yield bonds in America are issued by companies involved in energy production, distribution and exploration, Thomas Tzitzouris of Strategas Research Partners said.
  • Some U.S. shale producers are on the brink of bankruptcy, and that could have a “ripple effect” on credit markets, said Charles-Henry Monchau of Al Mal Capital.
  • That could have a knock-on effect on the economy at large. 
A pumpjack near the Yamashinskoye rural settlement in the Almetyevsk District.
Yegor Aleyev | TASS | Getty Images

Falling oil prices may be the "primary reason" for volatility in U.S. credit markets, including historic lows on Treasury yields this week, according to a fixed income strategist.

The credit market is sensitive to moves in oil because a "very large portion" of high-yield bonds in America are issued by companies involved in energy production, distribution and exploration, Thomas Tzitzouris of Strategas Research Partners said.

"There's just a lot of leverage there," he told CNBC's "Capital Connection" on Tuesday.

Charles-Henry Monchau, chief investment officer of Dubai-based Al Mal Capital, agreed that these firms are vulnerable to oil price shocks.

"They're on the brink, for some of them, of bankruptcies, and obviously this could have a ripple effect on the whole credit market," he said.

VIDEO2:3702:37
Weak oil prices could be long lasting after OPEC+ collapse, strategist says

Oil plummeted more than 20% on Monday after OPEC and its allies failed to agree on production cuts last week. Saudi Arabia, which initially suggested a large cut, said it would offer discounts on oil and plans to increase production after Russia refused to lower output at the OPEC+ meeting.

While crude futures were up on Tuesday, they are still too low for U.S. producers, said Tzitzouris, a director at Strategas.

Brent was trading at $37.50 a barrel in Asia's afternoon, up 9.23%. U.S. crude traded around $34.22, up 9.89%.

"Roughly speaking, you can make the argument that below $40 oil, most of these names, especially in the high-yield space, really can't survive," he said. "That drop in oil was perhaps the final straw for the U.S. credit markets."

All these markets – treasuries, equities, credit – are signaling that right now, the U.S. is very close to a recession within the next four to eight weeks.
Thomas Tzitzouris
Strategas Research Partners

Stephen Schork, editor of the Schork report, added that the U.S. shale industry was already on the cusp of "major bloodletting," even before Riyadh and Moscow's respective decisions.

"The decision by Saudi Arabia and by Russia over the last week is just going to hasten the demise of a significant portion of the U.S. shale patch over the next year," he said.

The knock-on effect of that on America's bond market could lead to an imminent recession, Tzitzouris predicted.

"Credit markets are signaling that we're getting close to the point of no return, where a recession is more or less inevitable," he said. "All these markets — Treasurys, equities, credit — are signaling that right now, the U.S. is very close to a recession within the next four to eight weeks."

– CNBC's Pippa Stevens contributed to this report.