UK cheapest loans. As accommodative monetary policy continued in all major currency zones, investor appetite for earnings continued. Low base rates and large volume of purchases of securities led to low yield of standard bonds, closely related to investment-grade assets. This increased demand for assets in the more risky part of the spectrum, which promised higher returns. So far, these assets have largely been able to fulfill their promise. Limited credit spreads contributed to high market returns on high-yield debt, while low defaults seen since the peak of the crisis held back credit losses.
However, it is still unknown whether a combination of narrow spreads and low default rates will be sustainable. Refunds were reflected in price indicators, such as credit spreads in major advanced economies. When selling on bond markets in May and June, these indicators indicated a widespread increase in borrowing costs and greater differentiation between borrowers in different risk categories. However, this phenomenon was short-lived.
For example, high-yielding spreads in local currency in the UK, euro and UK markets began to fall again at the end of June. At the end of November, these spreads were 300-600 basis points below their highs in 2012 and 200-300 basis points above their pre-crisis levels of 2006/07. The trend towards a return was just as obvious in quantitative terms. In the syndicated loan market, loans with borrowed funds – loans to borrowers with low leverage and high leverage – accounted for approximately 40% of the volume of new lending from July to November.
It is noteworthy that this share was higher during most of 2013 than in the pre-crisis period from 2005 to mid-2007, due to both higher loans with higher risk and lower lending in the less risky part of the credit spectrum. At the same time, the desire of investors to provide high-yield loans has led to a reduction in the share of syndicated loans that are protected by lenders. The trend towards more risky loans has been widely justified.
For example, it stimulated the in-kind bond market, which gives the borrower the opportunity to pay off their debts by issuing more bonds. The investor renewed interest in these instruments, which led to a new issue of more than $ 9 billion in the first three quarters of 2013, which is a third more than the total issue in 2012. This increase, despite the obvious risks of “making payments.”
Although trust funds own less than 5% of the mortgage-backed securities in circulation, they were exposed to the risk of changes in interest rates and the liquidity that they face. this is the attention of managers to themselves. Similarly, industry reports highlight the growing leverage in financing private equity acquisitions. In the UK, this share steadily grew after 2009, reaching two-thirds in October 2013, which is similar to the level of 2006/07. European banks, in turn, have benefited from the borrower market by increasing the issuance of subordinated debt, strengthening the cushion that protects their senior lenders from the consequences of potential future solvency problems.
However, spreads not only reflect perceived credit risk, but can also affect default rates. Of course, an environment with low interest rates stimulates the allocation of cheap and generous loans. Combined with the reluctance of creditors suffering from the crisis to report losses, this can facilitate refinancing and keep borrowers default afloat. If such a process is really going on, its stability will undoubtedly be tested by the final normalization of monetary policy. A steady return on investment in some regions coincided with the termination of the previously stable relationship between credit market conditions and economic conditions.
Loan calculator. For 15 years before the end of 2011, low or negative real growth was accompanied by high default rates and wide credit spreads. In the UK, this pattern has also been observed recently. In the euro area, on the other hand, default rates have declined since 2012, although there has been a two-year decline in the region, and the share of bad loans from banks has increased. In emerging economies, credit spreads declined from the end of 2011 to mid-2013 – just at a time when economic growth in these countries showed clear signs of slowdown. This suggests that the high risk appetite of investors raised credit ratings in capital markets and contained a level of default.