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They inject loads of liquidity, keep interests ultra-low and distort bank credit… and then they call the system results, systemic risks
Tuesday, October 30, 2018 7:05
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Sir, Colby Smith reports “the booming $1.3tn market for leveraged loans — or those extended to highly indebted companies that are then packaged up and sold to investors as bonds — has faced a tide of criticism from central bankers and financial watchdogs. Former US Fed chair Janet Yellen warned of the “systemic risk” rising from the loans.” “Systemic risk fears intensify over leveraged loan boom” October 30.
Smith quotes Douglas Peebles, the chief investment officer for fixed income at AllianceBernstein with “Investors are deathly afraid of rising interest rates so the floating rate component paired with the fact that these loans have seniority over unsecured bonds set up an easy elevator pitch to buyers that may not be fully aware of the risks”
Why are investors deathly afraid of rising interest rates? Clearly because the rates being so low for so long, paired with huge liquidity injections has built up a mountain of fix rate bonds that few dare touch; except those who by means of lower capital requirements are given strong incentives to go there, like banks and insurance companies.
In this respect “the booming $1.3tn market for leveraged loans” is not a systemic risk but a system result. That regulation that increases the exposure of banks and insurance companies to long term fixed rate bonds, and thereby increases the interest rate risk, that is a real systemic risk. The problem though is that central bankers and regulators will never want to understand they are the greatest generators of systemic risks… as Upton Sinclair said “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
