Since the summer, there has been a steady trickle of positive developments from the riskier parts of the credit market, most notably:
Pace of bankruptcy filings by large US Companies is slowest since Covid-19 pandemic began - Src: BBG
Rating agencies have downgraded IG index paper at pace of only $3 billion per week between 11 August and 11 September, from an average weekly rate of $100 bn in May - Src: US Investment Bank Research Team
Pace of US “Fallen-Angel” downgrades has fallen dramatically since with less than $10bn QTD compared to over $150bn in H1 2020 - Src: European Bank Research Team
Year-to-date returns in the U.S. leveraged loan market entered positive territory last week - S&P Global
So everything is okay then…or is it?
The direct involvement of the Fed in credit markets and the implicit backstop it has given to US Credit markets in particular has been the key driver to the slowing of deterioration of credit markets.
The trillion dollar question is what could cause these conditions to change? I have my views on this but that feels like an altogether separate blog-post…
I don’t believe the findings above are good lead indicators for future Credit Market conditions, but are more indicative of the search for yield from investors (in light of ultra low rates) and the assumption that the Fed and other Central Banks will have your back.
Digging into the bankruptcy article from Bloomberg, it goes on to say this:-
…the month (Sep-2020) is still on on track to be the busiest September since the Global Financial Crisis (15 filings). In the same month of 2008, there were 18 bankruptcies by large U.S. companies and 13 the following September, data compiled by Bloomberg show.
There have been 189 bankruptcy filings year-to-date by companies with more than $50 million in liabilities, according to data compiled by Bloomberg. That’s the most for any comparable period since 2009, when there were 271 in the full year, the data show.
As always, the devil in in the detail…not in the headline.
The pace of bankruptcies can change depending on a multitude of factors; e.g length of COVID19 disruption and/or Fed reducing implied support for Credit Markets.
So in summary, conditions are good right now, but historically things don’t tend to move in a linear fashion in credit markets or financial markets generally…