Optimists and pessimists are fighting a pitched battle in the $1.4 trillion U.S. high-yield bond market, causing pockets of incredible turmoil unseen in recent history.
On one side, some investors are starting to see some value in the debt after its biggest selloff since 2008, especially as oil prices seemed to stabilize and even rally a bit. (Pimco, for example, says now is a good time to buy the debt.) The other side still sees much more pain to come and is expressing this view in part by short-selling -- or just plain selling -- certain bonds. The result is a roller-coaster ride in some companies.
Consider Oasis Petroleum's $1 billion of bonds maturing in 2022. In just three months, the oil exploration and production company's debt plunged as much as 45.7 cents before recovering 32.1 cents of value in less than two months.
What's even more head-spinning is that Oasis isn't alone. The debt of other companies, particularly those in the energy and commodities industries, has dipped and surged in dizzying episodes.
Take a look at Freeport-McMoRan's $2 billion of debt also coming due in 2022. These notes just experienced a 26.3 cent drop followed by a 31.5 cent gain in less than three months.
Or how about Transdigm Group's $1.2 billion of bonds coming due in 2024. These CCC-rated notes have surged to 102.5 cents on the dollar from 92.5 cents less than a month ago, ending up a little higher than where they started at the beginning of December.
Similar volatility erupts in the flows into and out of junk-bond exchange-traded funds, which has reached "the highest since the 2013 'taper tantrum' convulsions," according to Bloomberg Intelligence credit analyst Richard Salditt.
"Net inflows swung wildly in recent weeks with investors reacting to commodity price volatility and lower global growth prospects," he wrote.
BlackRock's iShares iBoxx High Yield Corporate Bond exchange-traded fund, for example, experienced unprecedented inflows in the past week after more than a billion dollars was withdrawn just weeks earlier, Bloomberg data show.
It's hard to glean much comfort from this volatility. While the market appears to be on an upswing for the moment, it's unclear whether crude prices can continue to rally. Defaults are almost certainly going to increase, especially among U.S. energy companies. The volatility, and lack of clear direction, ultimately has a lot to do with market structure -- namely that investors are going after one another aggressively to squeeze them out of their views without dealers in the middle using their firms' capital to act as a buffer. It also doesn't help that the global economic picture seems rather cloudy, which has left a lot of more-committed money on the sidelines for now.
Big financial firms have curtailed their risk-taking in the face of new regulations and higher capital requirements, and because of this, they're less involved in cushioning wild swings in credit markets. So prices are swinging along with sudden shifts in positioning, sometimes even if it's a relatively small reallocation.
Someone will probably reap a tremendous profit from this turmoil. In the meantime, traders are getting a bad case of whiplash and having a hard time committing to longer-term convictions.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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