BBB rated corporate bonds could be the next market to collapse
0An article in today’s Financial Times points to a probable lack of buyers exacerbating any future sell-off in the market.
Steve Eisman, portfolio manager at Neuberger Berman, and famous for his bets against mortgage-backed securities during the financial crisis, told the paper that the market is threatened by a lack of depth, with banks cutting back heavily on their trading positions due to stricter rules on capital and liquidity.
The market has been weak for a while now.
Spreads ballooned out in 2018 as the Fed raised rates and the ECB promised to end its bond-buying programme, which it duly did in December.
The paper points out that the BBB market has expanded significantly since the financial crisis, with outstanding paper rising from $750bn at the end of 2007 to about $2.7trn now.
Most of the increase is due to low interest rates which have allowed many relatively highly leveraged companies (by investment grade standards) to keep trading relatively healthily.
In addition, 2018 saw a large volume of downgrades from the A category, including the huge bond issuer General Electric, swelling the ranks of BBB rated paper.
When investment grade issuers (rated BBB- and above) are downgraded to speculative grade, many holders, restricted by their funds’ rules, become forced sellers.
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