No Clear Skies Yet
Inquiring minds are slogging though the 78-page BIS annual report[1] looking for an all clear signal.
It's nowhere to be found. The BIS explicitly warns "No clear skies yet".
Monetary Policy Cannot Be Engine of Growth
Hitting the nail squarely on target, the BIS chastises central banks "What is good for today need not necessarily be good for tomorrow. More fundamentally, monetary policy cannot be the engine of growth."
Central banks, beg to differ. Markets are going gaga over expected rate cuts while Trump plays a year-long tune of on-again off-again tariff threats.
Overheating
The corporate sector in some countries has shown clear signs of overheating. Perhaps the most visible symptom of potential overheating is the remarkable growth of the leveraged loan market, which has reached some $3 trillion.
For quite some time, credit standards have been deteriorating, supported by buoyant demand as investors have searched for yield. Structured products such as collateralised loan obligations (CLOs) have surged – reminiscent of the steep rise in collateralised debt obligations that amplified the subprime crisis.
Fire Sale Collapse in Investment Grades
Given widespread investment grade mandates, a further drop in ratings during an economic slowdown could lead investors to shed large amounts of bonds quickly.
As mutual funds and other institutional investors have increased their holdings of lower-rated debt, mark-to-market losses could result in fire sales and reduce credit availability.
The share of bonds with the lowest investment grade rating in investment grade corporate bond mutual fund portfolios has risen, from 22% in Europe and 25% in the United States in 2010 to around 45% in each region...