The key lines of defence have held on Wall Street. The S&P 500 index of equities bounced off its 200-day moving average at the end of last week’s brutal sell-off, triggering a surge of buying by well-armed funds waiting for the technical signal.
Relief comes in the nick of time. The 10.2 per cent crash was starting to infect credit, the mechanism that can so easily cause what looks at first like a “healthy correction” to metastasize into an economic downturn. Borrowing costs on BBB-rated corporate debt in the United States have surged by 57 basis points to a 14-month high of 6.26 per cent since late January.
Credit default swaps measuring bankruptcy risk for junk bonds spiked on Friday to 356 after having weathered the first phase of the rout relatively untouched. This was becoming ugly for stretched debtors – potentially 20 per cent of the US corporate universe, says the International Monetary Fund – with California Resources seeing its yield spiralling up to 14 per cent, and Community Health hitting 21 per cent.
Marc Ostwald, a credit expert at ADM, says heavy withdrawals from exchange-traded bonds threaten to set off a self-feeding process.
“These ETFs have to sell the underlying assets and this can turn into a liquidation. We’re getting closer to the point where this could push the water over the edge. New issuance is basically drying up,” he said.