A cold chill is blowing through the bond market

frozen ice snow swimming polar siberia

(REUTERS/Ilya Naymushin)
Members of a local winter swimmers' club get out of the Yenisei River after a short swim amid air temperature measuring at about -36 degrees Celsius (-32.8 degrees Fahrenheit) in the Siberian city of Krasnoyarsk, December 12, 2010.

It is getting chilly out there.

UBS credit strategists Stephen Caprio and Matthew Mish put out a note Thursday titled "Non-Bank Liquidity Chilled by Macro Shocks."

By "non-bank," the strategists basically mean the bond market. And it isn't looking good.

Risky borrowers are being shut out of the market, and that means companies are going to be left with no way to refinance debt they took on when investors were in a more forgiving mood.

Business Insider has been covering the sell-off in the high-yield market for a while now. The pressure was initially kick-started by a slumping oil price, but has now spread across multiple sectors.

"This has significantly tightened non-bank liquidity, as low-quality borrowers are effectively shut out of the bond market," the note said.

"We estimate the weakness in non-bank liquidity is now at post-crisis highs, just surpassing levels seen during the Eurozone crisis."

Caprio and Mish cite two reasons for the continued pressure. First, there is the macro picture: a crashing oil price, weakness in US manufacturing, the strong dollar, and weak international growth.

Then there is the explosion in high-yield-bond issuance. Issuance boomed during the zero-interest-rate-policy era, and retail investors flooded in in search for yield. That has all come to a halt.

UBS high yield slide

(UBS)
High-yield-bond issuance has exploded since the financial crisis.

"Retail investors have been exiting the asset class since the Fed stopped expanding its balance sheet. In recent client meetings, a renewed sense of caution is palpable from credit investors," the note said.

Issuance in the fourth quarter was "terrible," according to the note, which added that reduced issuance from lower-rated companies is "never a structurally comforting signal."

Then the note gets biblical:

While many investors believe that a reduction in low-quality issuance is a positive as investors are “finding religion,” it exacerbates refinancing concerns after committing the original sin of populating the credit markets with low-quality debt that is not easily purged.

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