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Here's The Real Reason High Yield Energy Credit Risk Collapsed This Morning

A few market participants have noticed that the US High Yield Energy sector's credit risk collapsed 170bps this morning according to Bloomberg's data. This is the biggest plunge (rally) in the index of "incredibly risky stuff" on record and in the face of new cycle lows in crude, borrowing bases contracting, and rig counts crashing, this seemed odd... well here is why the index collapsed (spoiler alert - do not get excited).

So this happened and everyone rejoiced...

 

But here is why...

 

So what we see here is Rex Energy - trading at 6,901bps saw its risk drop 760bps and Mongolian Mining Corp trading at an epic 14,197bps saw its risk drop 413bps... and that compressed the index OAS overall.

In other words - the absolute riskiest of the risky crap end of the spectrum of verging on default energy firms have seen risk narrow (likely model valuations as opposed to actual transactions) and the headline index spread collapses.

So don't buy Energy stocks with both hands and feet just yet... it's just an index aberration.