A successful Covid-19 vaccine kills companies

Althea Spinozzi
Senior Fixed Income Strategist

Summary:  The vaccine we've all been waiting for unwittingly creates a swarm of zombies.

See previous 2021 prediction

The Covid-19 pandemic viciously accelerated the dangerous levering up of the global economy that unfolded during the 2008-09 financial crisis. Central banks printed ever more money and took policy rates close to the zero bound in all developed economies. The policy of near infinite liquidity provision and easing financial conditions at all costs has pushed global sovereign and investment-grade corporate yields to historical lows and forced investors to take positions in riskier assets.

As 2021 gets under way, the merciless march of lower yields has left yield-seeking investors sitting on a pile of low-yielding junk debt with terrible reward-to-risk profiles, as zombie corporates teeter on the brink of default, having only survived the pandemic months with handouts and the lower refinancing costs. The investors’ risky stance is justified by the prospect of an effective vaccine bringing a new boom in economic growth. But reality doesn’t prove so kind, as the vaccine roll-out and the removal of Covid-19 restrictions and normalisation leads to a sharp spike in inflation. In perfect hindsight it turns out the economy was vastly over-stimulated during the pandemic, and the ripping post-vaccine recovery rapidly overheats the economy. Inflation rises and unemployment falls so rapidly that the Fed allows long treasury yields to spike higher, taking the yield on riskier debt with it. 

The Fed ends up making a policy mistake by allowing financial conditions to tighten too rapidly via higher longer rates, having never implemented yield curve control as they were too distracted by the sudden spectre of 4-5% annualised inflation and 6-8% annualised wage gains by Q3. Corporate defaults rise to their highest in years, with the first to go the most over-levered companies in the physical retail space that were already struggling in the solid, pre-Covid economy. For the first time in economic history, a strong recovery sees rising defaults. 

Trade: Short HYG and JNK High Yield corporate ETFs

See next 2021 prediction:
Sun shines on silver, which sizzles on solar panel demand

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.