Credit flashers
November 29, 2019
–Stocks slightly lower as Trump signed the Hong Kong democracy bill, further complicating efforts for a trade deal with China. On Wednesday, US yields rose, with tens up 3 bps to 1.769%. This morning shows little change with TYH0 129-155. Today features an early close at 1:15 EST.
–Bloomberg running a headline this morning ‘China Financial Warning Signs are Flashing Almost Everywhere’. The story notes deteriorating health at smaller lenders and corporate debt at 165% of GDP in 2018. That’s an extraordinary ratio. As a comparison, according to an article in Forbes, as of July, US business debt (corporate plus small business) was 74% of GDP. A headline on FT says US distressed debt is flashing warning signals (hmmm…isn’t that why it’s DISTRESSED?). The sub-headline is: ‘More than 200 bonds in junk-rated index are trading at levels implying severe strain.’ Not too hard to believe, the St Louis Fed database shows that CCC option adjusted spread has now surpassed the high from late 2018, when stocks were cratering. In 2018, the CCC spread reached 11.15%,
–We’re now two weeks away from December eurodollar expiration. 0EZ, 2EZ and 3EZ 9850 straddles settled 12.0, 12.5 and 13.0 respectively on Wednesday, about fair. Eurodollar calendar spreads continue to convey the sense that the Fed will try to extend a pause through 2020, with a slight lean toward further modest ease. April Fed Funds settled 9850 or 1.50%, only 5 bps below the current EFFR with Dec, Jan and March FOMC’s in between. EDH0/EDM0 settled -9.0 (98.27 and 98.36), while Jan’20/Jan’21 FF spread settled -27.5, indicating just one ease next year.
