As corporate finance costs skyrocket, funds invested in high yield debt face massive outflows which are drying up liquidity in the market. The releases may soon surpass the catastrophic scenario of Esma’s recent stress tests.
The high yield bond market is deteriorating at an unprecedented rate. In one month, the interest rate charged to companies with the most fragile financial structure rose from 5% to almost 11% on average in the United States. What seriously jeopardize the refinancing capacity of these companies. While these levels remain lower than those reached during the 2008 crisis, the speed of the correction shocked the entire market.
The dynamic is the same in Europe, with an average rate now reaching almost 9%. Listed index funds (ETFs) show drops of nearly 20%, and are traded with haircuts that can reach 8%. In question: the evaporation of liquidity. The market is literally frozen and operators no longer have any visibility on the valuation of the underlying bonds.