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Gradual deterioration in the quality of corporate debt traded in the markets has been quite spectacular over 2018:
The above chart shows that at the end of 3Q 2018, the market share of BBB and lower-rated corporate credit is now in excess of 50%, in excess of USD4.4 trillion, matching prior historical record set at 4Q 2017-1Q 2018. BIS’ Claudio Borio was quick out on the rising risks: https://www.bis.org/publ/qtrpdf/r_qt1812_ontherecord.htm, saying “…the bulge of BBB corporate debt, just above junk status, hovers like a dark cloud over investors. Should this debt be downgraded if and when the economy weakened, it is bound to put substantial pressure on a market that is already quite illiquid and, in the process, to generate broader waves. … What does this all mean for the prospects ahead? It means that the market tensions we saw during this quarter were not an isolated event. … Faced with unprecedented initial conditions – extraordinarily low interest rates, bloated central bank balance sheets and high global indebtedness, both private and public – monetary policy normalisation was bound to be challenging especially in light of trade tensions and political uncertainty. The recent bump is likely to be just one in a series.”
You can read my views on the latter aspect of the markets dynamics in the post that will follow.