The U.S. Federal Reserve and fellow central banks are only trying to support economic growth and spur inflation. But their embrace of lower interest rates may pump up the price of assets that are already richly valued, or stoke demand for higher yields that come with elevated risks.
So where are the potential naked swimmers? Here are some asset classes that are already attracting scrutiny:Few markets draw more concern than leveraged loans, used by typically junk-rated companies to fund everything from private equity buyouts to shareholder dividends. With so much money chasing a limited supply of debt, companies have been able to borrow at cheaper rates and extract generous concessions, eroding the checks and balances that protect creditors. In fact, so-called covenant-lite loans now make up a majority of the debt issued in the market.The global yield hunt has also spilled over into markets that were once the sole domain of banks — in particular, lending to small and medium-sized businesses that typically can’t access capital markets.
Italy saw the yield on its two-year bonds slip into negative territory earlier this month and the 10-year bond yield has been halved from over 3% earlier this year. While political risks have abated in both of these countries, they still carry a huge debt burden that has spooked investors in the past, as seen in a spike in Italian yields in May last year as liquidity evaporated.Even some junk bonds now trade at levels where investors have to pay for the privilege of holding them.
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