How Much Longer Can Junk Bonds Ignore Tumbling Oil? UBS Has The Answer

One month ago, Goldman spotted a curious divergence in the energy sector: whereas in 2015 and 2016, the energy-linked asset class that had the highest beta to crude and was the most impacted as a result of the plunge in oil prices, was debt and specifically junk bonds while equities were relatively resilient to crashing crude prices, in 2017 this relationship had flipped, and – as of mid-May – despite the latest tumble in oil prices, HY Energy credits had returned 2.3% vs. 3.3% for the broader HY index, while Energy equities were down a whopping 9.6%.
And while Goldman made some educated guesses for this abrupt shift in security sentiment, there still is no accepted widely reason for this striking divergence.
One month later, UBS’credit analyst Matthew Mish picked up where Goldman left off, and in a note “Oil bear market: is corporate credit mispriced?” finds that the answer is mostly yes. Just like Goldman, Mish looks at the energy market in 2015 vs. today to answer the key question: “How has US energy changed?” Below we summarize several of his key thoughts:

This post was published at Zero Hedge on Jun 26, 2017.