Wall Street’s debt machine pauses as China’s real estate woes rattle stocks, cryptocurrencies, memes and more

Wall Street can wait.

That was the message Monday from most of the roughly $10.6 trillion US corporate bond market, a Wall Street behemoth that was dormant as investors around the world waited for possible spillovers from the debt burden of China’s second-largest real estate developer. .

A handful of U.S. investment-grade companies that initially lined up to issue corporate bonds on Monday chose instead to sit out the rocky patch, according to two bond investors and a syndicate banker, as volatility VIX,
spiked, sending global stocks, crypto assets – including bitcoin BTCUSD,
– and more tumble.

It was expected to be $20 billion to $25 billion in issuance this week, with four to five issuers lining up today, but they pulled out due to market volatility attributed to Evergrande, said Tom Murphy, head of US investment management. grade credits. at Columbia Threadneedle.

Concerns have grown that Chinese real estate developer Evergrande 3333,
could lose its grip on more than $300 billion in debt, causing ripples from the cooling Asian economy and possibly further into global financial markets.

Read: Will Evergrande Be China’s ‘Lehman Moment’? Wall Street Says No

The Dow Jones Industrial Average DJIA,
posted a 1.8% decline on Monday, the worst day in nine weeks, but the blue-chip index also finished well above the over 900-point plunge at the session low. The S&P 500 index SPX,
fell 1.7% and the Nasdaq Composite Index COMP,
loss 2.2%.

Among meme stocks, shares of GameStop Corp GME,
loss 6.2% and that of AMC Entertainment Holdings Inc. AMC,
fell 8.9%, while Coinbase Global Inc. COIN,
was 3.5% lower on Monday.

Coinbase’s bonds were among the top 10 most actively traded during a down day for the US corporate bond market, with the 3.625% bonds maturing in December 2049 being the most under pressure, according to BondCliq.

What happens now?

“Is Evergrande going to restructure? Most likely: Yes,” said John McClain, a Brandywine Global portfolio manager for high yield and corporate credit strategies, in a phone interview.

But McClain also thinks equity markets have generally been less “tuned to the underlying risks in China’s real estate market” than debt markets have been, as Evergrande’s US dollar-denominated bonds have been trading in the $20 range for some time.

Since bonds are often issued at face value, or a price of $100, this is a signal that debt investors see the potential for some of the Chinese lender’s bonds to lose about 80% of their value.

That doesn’t necessarily mean that US corporate bond markets are shielded from any spillovers, especially with spreads nearing record lows. Spreads are the level at which bond investors are paid above risk-free benchmarks, such as Treasurys, to offset default risks.

But the sell-off in equities should probably be prolonged and sharper before major moves in corporate bonds take place.

“We should probably see a 15% to 20% drop in equity markets before I think credit markets will see a material back-up in spreads,” McClain said.

Last week, corporate bond issuance this year reached nearly $1.16 trillion in the investment-grade sector and a record $355 billion in high-yield or “junk bonds,” according to BofA Global.

See: Major US companies start borrowing after Labor Day

“There are many people who owe money to that entity [Evergrande], and it’s a long way from the US investment grade market. But so was Lehman,” said a syndicated banker who was not authorized to speak on the matter publicly. “But it’s hard not to be optimistic on credit.”


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