The devaluation of the Chinese yuan in 2015 has caused a sharp plunge in European stocks and bonds of the US corporate sector. Since the crisis began, the yields of high risk corporate securities have been experiencing strong fluctuations. Therefore, the Bank of America/Merrill Lynch US High Yield CCC Yield, the index measuring the yields of the highest risk bonds, jumped from 13.58 percent to 16.18 percent.
Aside from junk bonds, the whole US market of corporate securities experienced huge selloffs. The energy sector was the one that suffered most.
However, the US stock market remained unshaken which is considered to be abnormal market behavior. Over the last two weeks, traders and investors have observed the expansion of credit spreads and lower volatility in the stock market at the same time. A similar situation occurred on March 6, 2008, just before Bear Stearns bank went bankrupt. However, it is worth mentioning that the conditions in financial markets were rather different seven years ago. Today, zero interest rates are widespread practically all around the world.
The expectations of the Fed’s interest rate hike affect the exchange rates determined by market participants. The increasing number of sellers, in its turn, also exacerbates the situation in the corporate bond market.
The People’s Bank of China has devalued its national currency for three times thus creating a serious panic wave in the global financial market which may lead to far-reaching consequences in the future.
