- “How The Investment Grade Dominos Will Fall” – UBS Explains
by Tyler Durden, www.zerohedge.com
According to Citigroup’s Matt King, it is now officially too late to save junk debt, which has entered the final stage of the credit cycle, the one where defaults for high yield bonds rise with every passing month.
Both what about investment grade, which according to Citi is still just ahead of the “bubble bursting phase”? Here is UBS’ credit strategist Matthew Mish with one take on what happens to IG debt over the coming 12 months.
How The Dominos Will Fall?
It is no secret to regular readers of our publications that we believe the credit cycle is quite advanced. As discussed in our HY outlook, we estimate that nearly $1tn of speculative-grade credits are at risk of default over the next downturn, as the stock of low-quality credit has soared. Recent contagion in US HY from energy woes has severely impacted ex-energy spreads while shutting down bond-market financing for low-quality credits. Our leading measure of non-bank liquidity has now even surpassed the weakness seen during the Eurozone crisis.These developments are a negative headwind for investment-grade corporates in 2016.
High-grade credits are also not without blemish; the post-crisis macro paradigm of Fed quantitative easing and the investor bid for yield has greatly expanded the size of risky BBB corporates. The total IG corporate universe has grown 110% from $2.08TN in Jan 2009 to $4.35TN today; the amount of BBB debt has ballooned 181% from $0.77TN in Jan 2009 to $2.17TN today (Figure 1). Hence, nearly 63% of the increase in US IG debt has come from the growth of more risky BBB-rated securities. BBB non-financial credits now make up 41% of the total IG market, the highest level ever outside of a recession (Figure 2).