Credit concerns
November 24, 2020
–Stocks responded positively to the news of Yellen’s selection as Treasury Sec’y and are higher this morning though not at new highs. Copper however, is at a new high for the move with HGZ0 over 3.30. In April HGZ was as low as 2.18. Action was muted in treasuries yesterday, though the curve had a small bounce. Tens ended at 85.5, up 2.7 bps on the day. Seven year auction today.
–New euro$ 1/16th strikes debuted yesterday with the featured trade being a buyer of 20k EDH1 9981.25/9987.5 c 1×2 for 0.5 to 0.75. Settled 0.75 (1.25 and 0.25) vs EDH1 9978.5. Euro$ premium remains diplomatically quiescent. Short Dec (0EZ0) 9975 straddle settled at 2 with futures right at strike with expiration 2 weeks from Friday.
–Both Bloomberg and FT ran stories today about China credit concerns. Other analysts have also noted increased default risks, which are accentuated by the recent interest rate increases. While China may have come out of the covid episode prior to other parts of the world, it seems as if underlying financial damage is only now coming bare. The US intends to sidestep any bankruptcy fears by keeping rates at zero. Forever.
–Here’s a clip from BBG: “While none of the companies [Pingdingshan Tianan Coal, Jizhong Energy, Tianjin TEDA Investment Holding, Yunnan Health and Culture Tourism Group] have missed debt payments, and all four are rated AAA by Chinese domestic ratings firms, their bonds have tumbled by at least 14% since Nov 10. That’s when a surprise default by a state-owned Chinese coal producer cast fresh doubt on the implicit guarantees that have long underpinned gov’t backed borrowers. ‘Most of the onshore bonds hit hardest this time share a common symptom: their profitability has lagged far behind their debt growth’ said Li Yunfei, credit analyst at Pacific Securities.”
–The specter of Triple A zombies! The “BBB cliff” has long been a story in the US, though credit spreads have returned almost to pre-covid levels. According to the St Louis Fed website, in January of this year the BBB option adjusted spread hit a low if 127 bps, and is now 148 bps (high of 396 bps in between). The low in February of 2018 was 115. Sort of ironic, China is moving nearer to the capitalistic model of letting badly run companies fail while letting more dynamic companies flourish, while the US hopes that zero rates save everyone.
