'Risk of a credit event surging' BofA says as coronavirus-fearing investors race out of the market's riskiest bonds

New issuances have come to a standstill, Societe Generale said.
It's one of a slew of risk markets pummeled by this week's coronavirus sell-off. Investors fear the virus will cause growth, supply, and financial disruptions at companies.
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Investors are dumping the riskiest corporate debt as the coronavirus sell-off worsens, and it's pushing up the risk of companies defaulting.

That's according to Bank of America, which said in a Friday research note that the risk of a credit event was "surging." The note pointed to "extreme bond ETF volumes" out of high-yield and a similar "ominous breakdown" in BKLN, a levered loan exchange-traded fund.

Coronavirus, the fast-spreading disease that has killed 2,800 and infected 83,000, has markets in a definitively risk-off mood this week, as investors question how a global spread of the disease will impact corporate growth, supply chains and, notably for debt markets, balance sheet health.

That's pummeled high-yield corporate bonds company debt rated below investment grade which credit markets see as the first debt in the credit structure to go bad if companies should face balance sheet difficulties. Bank of America said high-yield saw its third-largest outflows, about $6.9 billion, in history this week.

The iShares iBoxx High-Yield Corporate Bond ETF was down as much as 4.1% Friday against last week's closing price. The Invesco Senior Loan ETF , the index of leveraged loans with ticker symbol BKLN, fell as much as 3.7% in the same time period.

"Exogenous shocks often expose bad leverage," the note said.

And as investors are selling off companies' high-yield debt, also called junk bonds, those companies are having a harder time accessing new debt financing.

"Corporate debt issuance has come to a standstill in this sell-off," said Sandrine Ungari, head of cross-asset quantitative research at Societe Generale, in a note Friday. High-yield debt will bear the brunt of the halt in issuances, versus investment grade, she said.

Stress in the junk bond market is part of a broader landslide that's taken place in risk assets this week. The Dow Jones Industrial Average dropped 1,000 points Friday morning, after posting its biggest one-day point drop ever on Thursday. It's on track for its worst week since the financial crisis.

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