Credit Market Fear Gauge Jumps as Oil Renews Slide

Credit markets were ensnared in the global equities selloff Tuesday, with measures of corporate default risk in the U.S. jumping to a two-week high.

The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, jumped 26 basis points to 536 basis points at 4:32 p.m. in New York. A similar index for investment-grade debt jumped 4.6 basis points to 108.652, also a two-week high.

Yields on benchmark 10-year Treasuries dropped to the lowest in almost 10 months Tuesday, as declines in stocks and oil again darkened outlook for global growth. Amid the worst commodities rout in a generation, Standard & Poor’s downgraded some of the biggest U.S. explorers, including Chevron Corp., Hess Corp., Continental Resources Inc. and Devon Energy Corp.

“Growth concerns are still wreaking havoc, fundamentals have deteriorated, default rates are increasing and there is a huge influx of fallen angels which has everyone running for the hills,” said Michael Collins, a money manager at Prudential Fixed Income. “Things are somewhat oversold. Away from commodities, it’s a buyers market if you can withstand the volatility.”

Liquidity Weakness

Moody’s Investors Service said Monday that its Liquidity Stress Index, which rises when corporate liquidity weakens, rose to 7.9 percent in January from 6.8 percent in December, the largest one-month gain since March 2009 and the highest level since December 2009. Liquidity weakness is spreading “modestly” outside energy-related sectors, according to the report from the ratings company.

“What we’re really watching for is whether commodities-based weaknesses will spiral into other sectors,” said John Puchalla, senior vice president at Moody’s. “There is a risk-transmission avenue that we’re definitely watching -- the price of credit has certainly gotten more expensive, spreads have widened, and if that starts to cascade into other companies we’ll get a spiraling build-up of issues.”

Exchange-traded funds that hold U.S. junk bonds dropped. BlackRock’s iShares iBoxx High Yield Corporate Bond exchange-traded fund fell 0.7 percent to $77.9. The SPDR Barclays High Yield Bond ETF declined 0.8 percent to $32.5.

The extra yield investors demand to hold junk bonds more than Treasuries rose to 7.9 percent, according to Bank of America Merrill Lynch Index data. The measure reached a five-year high of 8.27 percent last week.

“Spreads have widened a lot with the fear that the world will continue to slow,” according to Sabur Moini, a Los Angeles-based money manager at Payden & Rygel, which oversees about $95 billion in fixed-income assets.

(Corrects Prudential unit's name in the fourth paragraph. Correction published Feb. 3.)
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