Oil’s Collapse Spills Into Non-Energy Debt, N.Y. Fed Data Show

Bonds of non-energy issuers may have been dragged down by an 18-month rout in oil markets as illiquidity in the energy sector spilled into the rest of the debt market, a Federal Reserve Bank of New York report shows.

Mutual funds that held corporate bonds faced waves of redemption requests from energy investors when oil prices fell about 65 percent from July 2014 to December 2015, Brandon Li and Asani Sarkar wrote in the Oct. 5 report. That spurred investors to sell more-liquid non-energy bonds, and it drove up yield relative to Treasuries, according to the report.

Oil’s turmoil explained about half of the increases in yield spreads of non‑energy high-yield issuers since July 2014, even though many non-energy companies might be expected to benefit from lower oil prices, according to the report. Free-falling energy prices accounted for more than 70 percent of the wider spreads for high-yield energy companies, the report shows.

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