The slump in sub-investment grade debt at the end of 2018 is a more accurate portent of the market than the rally since then, investors say.
Most of the 500 financial professionals who gathered this month at a hotel in Mayfair, London’s billionaire neighborhood, for a conference on debt markets organized by Citigroup Inc., are bracing for a storm.
In a show of hands, around 80 percent said they view the junk-bond slump at the end of 2018 that wiped billions from portfolios as “the shape of things to come” rather than “merely a bad dream,” according to a summary of the event by Citi.
Across town at the same time in the brutalist Barbican complex on the northern edge of London’s financial district, Bank of England Governor Mark Carney was giving a speech on the global economy. The booming market for lending to high-risk companies was evoking memories of the subprime crisis a decade ago, he said.
The chorus of warnings is getting louder from policy makers and industry insiders. They argue that risky companies have too much debt on their books, leaving them vulnerable to shocks such as higher borrowing costs.
Carney’s speech followed remarks from sources as diverse as U.S. Senator Elizabeth Warren and the Bank for International Settlements. The Federal Reserve revealed in minutes of the Federal Open Market Committee’s September meeting that some officials said the growth of leveraged loans and looser standards present “possible risks to financial stability.’’
“Some might argue they are ‘crying wolf’ but if we end up in a liquidity crisis, nobody can say they have not been warned,” said Jorgen Kjaersgaard, head of European credit at AllianceBernstein. Policy makers are upping the rhetoric because they are unwilling to apply the brakes with tighter monetary policy, so they “communicate about the dangers instead,” Kjaersgaard said.
The total of leveraged loans and high-yield bonds outstanding in Europe and the U.S. has doubled to about $2.65 trillion since the financial crisis, according to the BIS, known as the central bank for central banks.
“The idea that the market is over-levered is true, but the fact is, fund managers have to invest the money we’re given, so it means choosing between the lesser of evils,” said Rajat Mittal, a London-based specialist in high-yield debt at Bluebay Asset Management.
High-yield corporate bonds slumped to the lowest in more than a year during December in the U.S. and Europe, as investors took fright at the prospect of higher rates. They’ve since rebounded and have reached new peaks in the U.S., according to Bloomberg Barclays Indexes.