Impact Of Oil Collapse On High Yield Bond Market

Brent oil has entered into a bear market, as prices have fallen almost $30 a barrel since the beginning of the year.
With such large differences in exposure, we can see the importance of oil prices on the bond market.
With a challenging outlook, analysts have been downgrading micro and small-cap energy companies, resulting in an aggregate Analyst Revisions Model (ARM) score of 35.
By Tajinder Dhillon

Brent oil has entered into a bear market, as prices have fallen almost $30 a barrel since the beginning of the year. Initial worries over COVID-19 caused the largest weekly decline in Brent oil prices since January 2016, having declined 13.6% during the week of February 28.
The sell-off intensified when OPEC+ concluded its meeting on March 6 without a deal to further cut oil production. As a result, Brent oil suffered its largest one-day drop since 1991, declining 24.1% ($10.9/barrel).
Oil majors including Exxon (NYSE: XOM), Chevron (NYSE: CVX), BP (NYSE: BP), ENI (NYSE: E), and Total (NYSE: TOT) have all seen downgrades to Q1 EPS estimates and are all expected to miss earnings when they report next quarter according to the StarMine Predicted Surprise. Of this group, Exxon, currently, has the largest negative predicted surprise at -18.0%.
Impact on high yield bond market The impact of further declines in oil will be easily understood by the equity market. However, it is just as important to look at the impact on the bond market. Companies who default on debt obligations or face bankruptcy will directly impact the equity market.
The BAML U.S. High Yield Index looks at U.S. companies that issue high yield debt. The index contains over 900 companies and close to 2,000 bonds, providing a comprehensive view of the U.S. high yield market. An important question to ask is - how much of the index is exposed to the energy sector? The answer is 11.7%. For comparison, the energy sector has an approximate 2.8% weight within the S&P 500.
With such... Read more