Credit markets tsunami imminent?

Multiple data points suggest onset of a global credit crunch is imminent.

Blackstone/Carlyle asked all portfolio companies to immediately tap lines of credit with banks. Boeing did just that with a $14 billion revolver as its shares plunged 50% amid panic on the survival of many global airline clients.

The spread between BB and BBB rated credits has spiked to a horrifying 270 basis points. Cost to insure risky credits (CDS) has spiked across HY, IG, EMD as vols surge. Leveraged loan market has collapsed.

Wider US Treasury bond bid-ask quotes, a blowout in high yield/corporate bond credit spreads, a spike in CDS (risk insurance), freeze on new issuance in investment grade/MBS markets, even spike in AA municipal GO bonds all indicate systemic distress and a liquidity squeeze in the global bond market. The Federal Reserve will have no choice but to slash the Fed Funds rate by 100 basis points next week’s FOMC and restart QE. Expect tsunami of credit downgrades and default on overleveraged borrowers as the global economy slips into deep recession in 2Q 2020. Wild shifts in US Treasury yield curve makes leveraged bond investing with private banks a death trap strategy for investors in the GCC. Floating rate EM bonds the worst of all possible world as Fed Funds rate moves to zero while credit shocks escalate and oil is in free fall. Sadly, many private bank clients in GCC will be wiped out due to excessive leverage.

Matein Khalid is the Chief Investment Officer of Asas Capital Management. He has 25 years of experience in international capital markets as an advisor to family offices and fund managers. He has worked for investment banks/hedge funds in New York, Chicago, London, and Geneva. In addition, he has been the CIO of a technology fund in San Francisco, a royal investment office in Dubai and a public insurance company listed on the DFM.