The Coming Credit Meltdown Will Be As Bad As The Great Depression And The Financial Crisis: Deutsche

Tuesday, April 2, 2019
By Paul Martin

by Tyler Durden
Tue, 04/02/2019

With investor attention increasingly focusing on what most believe will be the catalyst for the next financial crisis, namely a tsunami in corporate defaults as a result of the disastrous combination of record leverage, higher rates and an economic slowdown, overnight we presented the view of FTI global co-leader of corporate finance and restructuring, Carlyn Taylor, who predicted that “a spike in defaults is on the way, sooner or later.”

The expansion is pretty long in the tooth and there’s definitely a lot of buildup. The activity level of restructuring is rising, maybe not at the rate of bankruptcies, but the pipeline of companies we think are going to end up in restructuring, based on metrics that we analyze, that volume has gone up. And we’re so busy, which we don’t think is just market share, because we think our competitors are also very busy.

… a growing number of strategists are warning that corporate bond market illiquidity is an even greater risk factor.

Not long after Goldman most recently warned that the biggest threat facing the broader market in general, as well as corporate bonds in particular, is a sudden collapse in liquidity, overnight UBS credit strategist Steve Caprio and his team laid out four major reasons why global corporate bond market liquidity has deteriorated over time.

These are:

1.Rising investment fund ownership of corporate debt,
2.Low interest rates,
3.A lack of dealer intermediation, particularly in periods of rising credit risk, and
4.Potential new EU regulation on trade settlement failures.

UBS notes that credit investors were shocked by the spread blowout in Q4’18, followed by major spread tightening in Q1’19, and notes that “these spread moves are worrying in that they are somewhat divorced from fundamentals, as default risks remain low.” The bank then notes that it believes these shifts in risk premia are likely to remain with us for the foreseeable future, and as evidence is uses a novel liquidity tracker by the Intercontinental Exchange which highlights that global HY bond liquidity has been deteriorating steadily since 2016, while the bank’s own simple measure of gauging HY liquidity, through the beta of spread changes to flows, is also elevated.

The Rest…HERE

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