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Wall Street can wait.
That was the message on Monday from most of the roughly $ 10.6 trillion U.S. corporate bond market, a Wall Street colossus that slowed down as investors around the world watched for the potential fallout from debt problems of China’s second-largest real estate developer.
According to two bond investors and a syndicate banker, a handful of prime U.S. companies, initially lined up to issue corporate bonds on Monday, have chosen to stay away from the rocky area as VIX volatility,
spiked, sending global stocks, crypto assets – including bitcoin BTCUSD,
– and more tumbling.
Expectations were $ 20 to $ 25 billion in issuance this week and there were four to five issuers lined up today, but they pulled out due to market volatility attributed to Evergrande, said Tom Murphy, manager. quality American credit. at Columbia Threadneedle.
Concerns have grown more than Chinese real estate developer Evergrande 3333,
could lose its grip on more than $ 300 billion in debt, causing ripples throughout the cooling Asian economy and potentially beyond in global financial markets.
Read: Will Evergrande be China’s “Lehman Moment”? Wall Street says no
The Dow Jones Industrial Average DJIA,
was down 1.8% on Monday, its worst day in nine weeks, but the blue chip index also ended well above its drop of more than 900 points to the session low. The S&P 500 SPX index,
fell 1.7% and the Nasdaq Composite Index COMP,
lost 2.2%.
Among the meme actions, the actions of GameStop Corp GME,
lose 6.2% and those of AMC Entertainment Holdings Inc. AMC,
fell 8.9%, while Coinbase Global Inc. COIN,
was 3.5% lower on Monday.
Coinbase bonds were among the 10 most actively traded in a down day for the U.S. corporate bond market, with its 3.625% bonds due December 2049 under the greatest pressure, according to BondCliq.
What happens next?
“Is Evergrande going to restructure? Most likely: yes, ”said John McClain, Brandywine Global Portfolio Manager for High Yield Credit and Corporate Credit Strategies, in a telephone interview.
But McClain also believes that the stock markets were generally less “sensitive to the underlying risks of the Chinese real estate market” than the debt markets, given that Evergrande’s U.S. dollar bonds have been trading in a range of $ 20 since. some time.
Since the bonds are often issued at par, or priced at $ 100, this indicates that debt investors see the potential for some of the Chinese lender’s bonds to lose around 80% of their value.
This doesn’t necessarily mean that US corporate debt markets have been immune to any threat of overflow, especially with spreads near their all-time lows. Spreads are the level at which bond investors are paid above risk-free benchmarks, such as Treasuries, to offset the risk of default.
But the stock selloff is likely to be long-lasting and more pronounced before major moves occur in corporate bonds.
“We probably have to see a 15-20% drop in the equity markets before I think the credit markets will see a significant backup in spreads,” McClain said.
Last week, corporate bond issuance this year stood at nearly $ 1.16 trillion in the investment grade sector and a record $ 355 billion in high yield or junk bonds. bonds, ”according to BofA Global.
See: Big U.S. corporations to launch loan boom after Labor Day
“There are a lot of people who owe money by this entity [Evergrande], and it is far removed from the US investment grade market. But Lehman too, ”said a union banker who was not authorized to speak publicly about the matter. “But it’s hard not to be optimistic about credit.”
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