Morgan Stanley warns this corner of the credit market could be first to implode as interest rates rise

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These loans could be the “canary in the credit coal mine” due to their floating interest rates and the increasingly poor creditworthiness of issuers, a team at Morgan Stanley warned.

Now that Federal Reserve Chairman Jerome Powell has made it abundantly clear that the Fed has no plans to slow the pace of interest-rate hikes, some bond-market experts are warning that the most speculative areas of the credit market might be in for a rude awakening.

The era of low interest rates that followed the Great Financial Crisis of 2008 caused the leveraged loan market to balloon. According to data cited by Morgan Stanley’s Srikanth Sankaran, it has nearly doubled in size since 2015 to $1.4 trillion in loans outstanding as of the end of June. Much of this issuance was tapped by private equity firms to finance corporate buyouts, or simply to refinance.

However, they added that a blowup isn’t a foregone conclusion, and Wells is maintaining a “neutral” outlook on the space.

 

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