Oil Price Rally Impacts High Yield Bonds

Commodity prices have the ability to drive asset price movements. The link between oil and high yield debt has been exceptionally strong since 2015

Dan Kemp 26 October, 2016 | 8:00AM
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In early 2016, when the oil market was in tatters, market participants were waiting for a definitive policy announcement from the intergovernmental body OPEC to reduce the supply/demand imbalance and support the oil price. In the end, this never came and the market was left to its own devices, finally finding support at approximately $26 a barrel in February. Fast forward eight-months with the oil price around $50, we have finally seen OPEC make a move.

Despite the late arrival, OPEC has indicated an output freeze will likely transpire, which is important given OPEC represents approximately 43% of the world’s oil output and 73% of “proven” oil reserves, as of 2015. Even countries outside OPEC, including Russia, appear supportive of action to reduce the supply overhang and seemingly committed to curbing production too. This is generally supporting commodity sentiment, with oil hitting a 15-month high and follows a strong level of inflows to commodities through August.

Commodity fund flows over the past five years

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About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA