Energy "crisis" is a drop in the bucket

This year's plunge in oil and natural gas prices—oil down almost 50% and natural gas down 35%—sparked fears that defaults on energy-related debt could trigger a broad-based economic slowdown and/or financial crisis. Those fears have largely subsided, however, likely because the market has had a chance to look at the numbers, and they are not very scary. The losses on energy-related high-yield debt in recent months represent only 2.2% of the value of the U.S. high-yield debt market, and a mere 0.1% of the value of the U.S. bond market.

Some relevant facts, all drawn from the BoA Merrill Lynch bond database as of 12/23/14:

Market value of all U.S. high-yield debt: $1.35 trillion
Market value of all high-yield energy debt at its August '14 peak: $0.21 trillion (15% of all HY debt)
Market value of all high-yield energy debt (current): $0.18 trillion
HY energy debt losses from peak: $0.03 trillion (14% of HY energy debt, 2% of all HY debt)
Market value of all high grade corporate debt: $5.1 trillion
Market value of outstanding Treasuries: $12.4 trillion
Market value of outstanding mortgages: $9.4 trillion
Market value of all U.S. Treasury, corporate and mortgage debt: $28.3 trillion
Market value of all U.S. equities: $23.4 trillion

The likely defaults on U.S. high-yield energy debt ($30 billion) are essentially a drop (0.1%) in a very large bond market bucket ($28.3 trillion).

$30 billion is a very small number compared to the total value ($51.7 trillion) of U.S. bonds and equities. Losses of this magnitude happen frequently and often many times each day.

Things were much worse in 2008, when HY debt suffered a total return loss of almost one third. The loss suffered by HY energy debt this year from the peak is 13%, whereas total HY debt loss has been only 3.3%.

Posted by Unknown

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