Fastest Pace Of Downgrades Ever (Since 2002)

The charts below show the changes in spreads compared to the last slowdown from 2014-2016. As the top chart shows, energy high yield spreads spiked quicker than last slowdown and reached a higher point. We need the price war to end to see a serious tightening in spreads. It would also help if the recession ends quickly. Analysts have even gone as far to project negative oil prices because there is a limited amount of tanker storage capacity. Price is based on the marginal barrel and right now no one wants that barrel. Supply is way more than demand. The good news is that will work itself out through a decline in production as Chevron cut its 2020 capex guidance from $20 billion to $16 billion. Low prices should help demand, but people are stuck inside, so demand has become more inelastic than usual.  

Source: Merrill Lynch

The bottom chart shows high yield spreads excluding energy. Energy dominates the high yield market as fracking was a debt bubble. Surprisingly, we’re seeing another downturn even though the bubble already burst somewhat. Notice the bottom chart has lower yields as the scale is different. Relatively speaking, other high yields have wider spreads now than the last slowdown which makes perfect sense because the 2014-2016 slowdown was about energy. This time it’s because of the oil supply shock and COVID-19. There is a recession this time unlike 2015 and 2016 which escaped one.

Extra Unemployment Insurance

Obviously, $1,200 isn’t enough money for people to last through this economic shutdown if it lasts more than a couple of weeks. That’s why there is unemployment insurance. States have various rules on unemployment insurance (in terms of length and payment). The stimulus plan adds $600 to unemployment insurance for 4 months and extends it to gig workers which is hugely important as these workers had been excluded by this important safety net.

There was a mini scuffle on Wednesday about the fact that some workers will be making more money as unemployed than working, but the amendment to cap unemployment pay at 100% failed. It will be great for the economy if some workers earn more money. They will probably save that extra money (or pay down deb) because everything is uncertain when you don’t have a job.

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