Bond market credit cycle is 'past midnight' amid loan risks: Dan Fuss - Business Insider

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The 'Warren Buffett of bonds' says the credit cycle has moved 'past midnight' — and explains why he's alarmed about the riskiest corner of the corporate debt market

and producing above-average returns. The firm where he also serves as vice chairman manages $286 billion in assets.

It is none other than the leveraged-loans market, which has outstanding balances of roughly $1.4 trillion according to the Bank for International Settlements. Leveraged loans are extended by banks to companies with weak credit ratings, and sold in bundles to investors. They are sometimes likened in structure to the mortgage pools that brought the financial system to its knees over a decade ago.

His observation comes near the end of a rough year for companies with the weakest credit ratings. The bonds issued by such companies underperformed as investors worried about aFuss is far from the only one with concerns about a potential corporate-debt crisis. Data fromshows that the yield gap between low-rated CCC bonds and their better-rated BB peers is at its widest in three years.

He recalled that as mortgage pools grew in the 2000s, so did home prices and the allure of investing in real estate. But after some time, mortgage defaults started rising too.

 

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