Scaling Walls

Before the refinancing wave of the past four years, junk-rated borrowers in 2010 had faced $1.2 trillion of maturing debt over a five-year period. Those maturities were whittled down after $1.3 trillion of speculative-grade issuance in the U.S. since March 2010, Bloomberg data show.

The mortgage crisis that prompted the Fed to expand its balance sheet to more than $4 trillion was exacerbated by a shadow banking system of commercial-paper conduits and collateralized debt obligations that seized up. By 2008, mounting losses on home loans triggered JPMorgan Chase & Co.’s emergency acquisition of Bear Stearns Cos. and the collapse of Lehman Brothers Holdings Inc. and led to more than $2 trillion of writedowns and credit losses by banks globally.

New rules written since 2008 have sought to bolster lender balance sheets while curbing leverage and outsized risks taken in derivatives markets. While signs of such systemic risk haven’t returned to pre-crisis levels, market observers including Fed Governor Jeremy Stein have raised concern that the corporate-debt market is showing signs of a bubble.

Stein has said some credit markets, such as corporate debt, show signs of excessive risk-taking, while not posing a threat to financial stability. Fed Bank of Dallas President Richard Fisher, a former managing partner of a fund that bought distressed debt, said in a January speech that he’d “have to hire Sherlock Holmes to find a single distressed company priced attractively enough to buy.”

“Things seem somewhat calm, but that’s part of the difficulty with this job is trying to predict what might happen,” said Sabur Moini, a high-yield money manager at Payden & Rygel in Los Angeles. “You just don’t know when it might happen and what the magnitude might be.”

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