24 International Financing Review March 21 2020Investment-grade ETFs, CDS hit hardest
Liquidity in the doldrums in cash markets
)NVESTMENT
GRADEûINDEXûPRODUCTSûINCLUDINGû
#$3ûANDû%4&SûHAVEûBEENûCOLLAPSINGûFASTERû
than their high-yield counterparts in the
sell-off ripping through credit markets, a
RESULTûOFûINVESTORSûSCRAMBLINGûFORûBROAD
BASEDûHEDGESûDUEûTOûAûLACKûOFûALTERNATIVESûINû
the increasingly illiquid corporate bond
market.
Single-bond liquidity is in the doldrums,
ACCORDINGûTOûINVESTORSûANDûTRADERS ûWHOûHAVEû
BEENûlNDINGûITûEASIERûTOûSELLû#$3ûANDû%4&SûINû
DECENTûSIZEû!NDûINVESTMENT
GRADEû
instruments, which reference a bigger
market than high-yield products, are
PROVINGûTOûBEûTHEûlRSTûPORTûOFûCALLûFORû
INVESTORSûTRYINGûTOûRAISEûCASHûWHILEûTHEû
secondary bond market is frozen.
As panic spread across the market, LQD,
I3HARESûI"OXXûû)NVESTMENTû'RADEû#ORPORATEû
Bond ETF closed at a discount-to-net-asset-
VALUEûOFûûONû-ARCHûûnûTHEûLARGESTûDISCOUNTû
seen in 10 years and a sure sign of stress.
In comparison, iShare’s HYG $ High-Yield
Corporate Bond ETF’s discount to NAV was
0.5% on the same day.
h;)NVESTMENT
GRADEûPRODUCTS=ûAREûPROBABLYû
just more liquid so easier to sell,” said a
London-based high-grade syndicate banker.
“The high-yield ones will catch up and
UNDERPERFORMûTHEûINVESTMENT
GRADEûONESûINû
this crisis since the companies more
exposed to the economic slowdown are
MOREûREPRESENTATIVEûINûTHEûHIGH
YIELDû
indices,” he said.
)NûTHEû#$3ûMARKET ûINVESTMENT
GRADEû
INDICESûHAVEûALSOûUNDERPERFORMEDûASû
INVESTORSûHAVEûREACHEDûFORûTHEûMOSTûLIQUIDû
HEDGESûTOûCOVERûTHEIRûPOSITIONS
Analysts at Citigroup said in a recent report
that that has led to compression between
HIGH
YIELDûANDûINVESTMENT
GRADEûINDICES
h)NTOûANYûRISK
OFFûMOVE ûHEDGERSûINITIALLYû
tend to concentrate on the index: it’s liquid
and cheaper than single-name CDS,” they said.
h%VENûAMONGSTûTHESEûINDICES ûINVESTORSû
PREFERûTHEûMOREûLIQUIDûINVESTMENT
GRADEû
ones to hedge ... [creating] a slightly
COUNTERINTUITIVEûFEATUREûCOMMONûTOûALLû
MARKETûSELL
OFFSûWEûHAVEûSEENûGOINGûBACKûTOû
THEû;GREATûlNANCIALûCRISIS=v
4HEREûHAVEûBEENûFARûGREATERûTRADINGûVOLUMESû
INûINVESTMENT
GRADEû#$3ûINDICESûSINCEûTHEûSELL
OFFûBEGANû4HEREûHASûBEENû53BNûINûTRADINGû
INû#$8û.!û)' ûTHEû53ûINVESTMENT
GRADEûINDEX û
OVERûTHEûPASTûTHREEûWEEKSûCOMPAREDûWITHû
53BNûINû53ûHIGH
YIELDû#$3ûINDICES û
according to data from ISDA.
By comparison, there was US$430bn in US
INVESTMENT
GRADEûCORPORATEûBONDûTRADINGû
OVERûTHATûPERIOD ûACCORDINGûTOû-ARKET!XESSLIQUIDITY SHUT-DOWN
The meltdown is also a result of a global
INVESTMENT
GRADEûDEBTûMARKETûTHATûHASû
EXPLODEDûINûSIZEûSINCEûTHEûlNANCIALûCRISISûOFû
2008 without corresponding growth of
actual traders to facilitate liquidity in trading
INDIVIDUALûCORPORATEûBONDS
“If you think about dealer balance sheets
and the number of participants in the credit
markets, it hasn’t changed since the
lNANCIALûCRISIS vûSAIDû*IGARû0ATEL ûAû.EWû9ORK
based credit analysts at Barclays.
h"UTûYOUVEûSEENûSIGNIlCANTûGROWTHûINûCREDITû
MARKETS ûALBEITûDIVERGENTûTRENDSûnûTHEû
INVESTMENT
GRADEûMARKETûHASûGROWNû
SIGNIlCANTLYûWHILEûTHEûHIGH
YIELDûMARKETûISû
SHRINKINGû4HISûELEVATEDûVOLATILITYûMEANSûITûHASû
BEENûMOREûDIFlCULTûFORûDEALERSûTOûPROVIDEûENOUGHû
LIQUIDITYûTOûDEALûWITHûELEVATEDûDEMANDv
4HEûVOLUMEûOFûCORPORATEûDEBTûREACHEDûANû
all-time high of US$13.5trn at the end of
ûACCORDINGûTOûANû/%#$ûREPORTû
published in February.
At the same time, there has been a sharp
reduction in the corporate bond holdings of
SECURITIESûBROKERSûANDûDEALERSûnûFROMû53BNû
INûûTOû53BNûINû ûSAIDûTHEû/%#$
Many brokers in the market now do not
HAVEûBALANCEûSHEETSûBUTûONLYûBIDOFFERS ûAû
,ONDON
BASEDûHIGH
YIELDûINVESTORûSAIDû3UCHû
BROKERSûHAVEûTAKENûPROlTûAWAYûFROMûBANKS û
WHICHûHAVEûSEENûINCREASEDûREGULATIONûANDû
are no longer as willing to make markets.
“Regulation has reduced sellside balance
sheets – but hasn’t touched the buyside. Real
money owns hundreds of millions of one HY
or IG name, and they can’t get out of it. It’s
PUREûPANICûOUTûTHERE vûSAIDûTHEûINVESTOR
!TûTHEûMOMENT ûINVESTMENTûGRADEûISûPRICINGûINû
a higher probability of recession risk than high-
yield, especially by the US dollar market, wrote
Deutsche Bank analysts in a recent report.
53ûDOLLARûINVESTMENT
GRADEûSPREADSûAREû
PRICINGûnûOFûhNORMALvûRECESSIONûLEVELS û
according to a Deutsche Bank report published
on March 13. High-yield spreads in both euros
and US dollars are pricing in around 50%–55%,
based on Deutsche’s calculations.
US dollar Triple B bonds are now around
270% of the size of US dollar high-yield market,
according to Deutsche Bank. That number was
ATûûJUSTûBEFOREûTHEûlNANCIALûCRISIS
h7EVEûNEVERûHADûSUCHûAûBIGûPOTENTIALû
liquidity problem through history as we do
TODAY ûWHICHûMAYûMAKEûTHINGSûOVERSHOOTûINû
a recession,” analysts wrote.
The problem is also that the situation is
changing faster than traders and buysiders
CANûGETûTHEIRûHEADSûAROUND ûSAIDûTHEûINVESTOR
Eleanor Duncan, Christopher WhittallWEEK IN NUMBERS
207.59%
THE LEVEL THAT THE VVIX INDEX HIT
LAST WEEK, WHICH MEASURES THE
VOLATILITY OF THE VIX INDEX. THE LEVEL
HIT A RECORD HIGH IN A SIGN THAT
MARKET UNCERTAINTY IS EVEN GREATER
THAN IT WAS DURING THE FINANCIAL
CRISIS56%
THE FALL IN US CRUDE FUTURES IN A
10-DAY PERIOD UP TO MARCH 18, THE
WORST 10-DAY STRETCH SINCE THE
CONTRACT WAS LAUNCHED IN 19833.01%
THE YIELD THAT 10-YEAR BTPs HIT ON
MARCH 18 BEFORE THE ECB PEPP, MORE
THAN 200bp HIGHER THAN WHERE IT
WAS AT THE BEGINNING OF MARCH AS
THE COUNTRY SUFFERS THE HIGHEST OF
NUMBER OF DEATHS FROM CORONAVIRUS
IN EUROPE51.469
THE BID PRICE ACCORDING TO
TRADEWEB FOR UNICREDIT’S €1.25bn
3.875% PERP NON-CALL JUNE 2027 AT1
THAT PRICED AT PAR ON FEBRUARY 12101.08
THE LEVEL OF THE DOLLAR INDEX,
ITS HIGHEST IN THREE YEARS AS
CORONAVIRUS FEARS FUEL A FUNDING
CRUNCH0.51.52.53.54.55.56.5- 5
8.54/1/104/1/114/1/124/1/134/1/144/1/154/1/164/1/174/1/184/1/194/1/209011013015017019021018/02/2019/02/2020/02/2021/02/2024/02/2025/02/2026/02/2027/02/2028/02/2002/03/2003/03/2004/03/2005/03/2006/03/2009/03/2010/03/2011/03/2012/03/2013/03/2016/03/2017/03/20%6 IFR Bonds 2325 p 23 - 45 .indd 24 20 / 03 / 2020 19 : 59 : 39