How Much Of An Impact Is Oil Having On Credit Markets?

In a new report, Deutsche Bank analyst Ed Reardon discussed the impact that low oil prices are having on credit markets. Low oil prices are hurting the high yield energy credit market, but consumer credit and aviation debt markets have benefited.

Deutsche Bank is now projecting $33/bbl for Brent and WTI in the short term. The firm’s commodity analysts believe a significant price recovery in the short term is very unlikely.

Reardon noted that different subsectors of the high yield energy companies have been impacted by the price slump in different ways. Oil services companies were hit hardest and quickest, while E&P companies have the most exposure.

“Using a default scenario from the telecom sector in the early 2000s, together with projected downgrades and further price declines, we find high yield energy could have further to fall, with the exception of CCC energy credits,” Reardon explained.

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While diversity in commercial mortgage backed securities (CMBS) generally reduces risk exposure, Reardon noted that energy-specific tenants and/or regional concentration in areas like Houston have led to weaker credit performance in the space.

However, cheaper gas and fuel has provided a major boost to the consumer ABS and aviation debt markets.

So far this year, the iShares iBoxx $ High Yid Corp Bond (ETF) HYG is flat, while the iShares IBoxx $ Invest Grade Corp Bd Fd LQD is up 1.6 percent.

Disclosure: The author holds no position in the stocks mentioned.