Saturday, July 28, 2018
Like most people, you probably assume that the level of lending done by banks at any moment is largely driven by how much demand there is from borrowers. But in the world of modern finance, that's only part of the story. For just as important is the level of demand from investors -- pension funds, hedge funds, mutual funds, sovereign wealth funds and insurance companies -- to buy the loans that banks make. Indeed, there are times when there's so much demand for loans from investors and the profit from selling them is so lucrative that bankers are only too happy to go out and make bigger and riskier loans than they would if they were keeping them on their own books. That was the situation back in 2006 when investors were so keen to own "mortgage-backed securities" that Wall Street was begging lenders for more and more "product." You know how that turned out.
Now it is happening again, as investors and money managers scramble to buy floating-rate debt -- debt offering interest payments that will increase as global interest rates rise, as they are expected to over the next few years. A big new source of floating-rate credit is the market for "leveraged loans" -- loans to highly indebted businesses -- that are packaged into securities known as "collateralized loan obligations," or CLOs. Because the market seems to have an insatiable appetite for CLOs, leveraged lending and CLO issuance through the first half of the year are already up 38 percent over last year's near-record levels.
The stock market is being propped up by junk debt and regulations that were controlling it have been killed by Trump.
Bonfire of vanities 2.0 coming up.
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