Goldman: High Yield Selloff Won't Stabilize Until Oil Does

Tim Anderson of TJM Investments commented in a research report to subscribers that "tremors" in the high yield debt market "reverberated" on Friday following Third Avenue's decision to close its High Yield Fund and halting redemptions.

"The move by Third Avenue sparked a mass exodus among holders of High Yield ETFs as well as an overwhelming interest among anyone with exposure to high yield to sell, or hedge what they couldn't sell (most of it), by selling high yield surrogates or derivatives," Anderson wrote.

Anderson continued that Friday's trading activity produced "record volumes by a mile" among high yield ETFs. As an example, iShares iBoxx $ High Yid Corp Bond (ETF) HYG's volume of 54 million shares was more than double its prior record volume – which was incidentally set just a few days ago on Tuesday.

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Anderson added that Friday's trading theme quickly became an exercise in "sell what you can, if not what you want to" as investors shifted out of anything "resembling risk assets" into cash.

Finally, Anderson pointed out that oil's closing low print during the depths of the 2008-2009 financial crisis was $32.30. If oil "threateningly" closes near that level on weakness, the "hype and the bearishness might be strong enough to help ignite a trading rally."

Lotfi Karoui of Goldman Sachs commented in a note that 2015 could likely prove to be the worst non-recession year for high yield assets. The analyst noted that high yield returns moved to their lowest level on the year, as the "pressure" from low oil prices continues to "constrain risk appetite."

Karoui continued that the end of 2014 saw a "strong recovery" of risk appetite in the final trading weeks of the year. However, the prospects for a similar move in the final trading days of 2015 are "quite low."

"Unlike last year, investors have withstood a longer period of levered losses after idiosyncratic risk permeated the high yield market, and not just in the Energy space," Karoui wrote. "The heavy redemptions, rock-bottom levels of risk tolerance, and persistent downside risk for oil prices will likely continue to weigh on high yields."