Fed rate hike could hit US energy firms, oil explorers hard

LONDON (ShareCast) - (ShareCast News) - The plunge in energy prices had driven spreads in the market for high-yield debt to worrying levels for the sustainability of debt financing in oil and gas, as well as for those companies who supply to them, an independent strategist warned on Monday. Their situation was still far from what was seen among sub-prime mortgage lenders in the run-up to the 2007-2009 financial crisis, "but the situation is getting worse. A Fed hike would be a costly and embarrassing policy error," Ashraf Laidi said in a research note sent to clients.

Laidi emphasised how one chart pattern in particular might be sending a warning signal.

The 55-week moving average for Barcap's 10-year US high-yield bond spread index had crossed its 100-week moving average to the upside. Such a combination is known to technical analysts as a 'golden cross' pattern and is often followed by further moves higher.

It (Other OTC: ITGL - news) was the first such chart pattern since August 2007, Laidi said.

Sub-investment grade US energy (NasdaqCM: USEG - news) bonds show a yield of 11%, a little off its July 2009 high and almost double its 5.9% rate a year ago, the strategist added to back up his arguments.

"With treasury yields on the rise and high yield spreads following closely behind, even a modest Fed hike would have a not-so modest impact on the sustainability of debt financing in oil and gas as well as the suppliers dependent upon on them (like Caterpillar (NYSE: CAT - news) )."