Tracy Alloway

I’m a little late to this annual tradition but here it is — highlights from 2019’s collection of credit-related stories. This is by no means a full list of my work this year, but these are the things that I’m thinking about as we enter the new decade.

Did Fed Know What Credit Markets Didn’t? Loan Bankers Get Strict, February 7
It’s easy to forget this now, but in early 2019 the market was all-aflutter over the Federal Reserve’s Senior Loan Officers Survey, which showed banks tightened lending standards over the last three months at the fastest rate since the middle of 2016. The furor died down as banks began easing standards again (though tightening for C&I loans has since resumed) and the Fed lowered rates, but it hints at the amount of concern out there about overheating in the credit market.

Hot Rally Raises Questions of What’s Really Cooking in Credit, March 22
The almost complete recovery in credit markets since the sell-off in late 2018 plus a dovish Federal Reserve helped refocus attention this year on the multiyear boom in corporate debt. That boom means investors are arguably accepting worse deals for less return. For Deutsche Bank analysts, the dynamic has shades of a previous Wall Street boom.

CLOs Are Starting to Look More Alike, Stirring Uneasy Memories, June 11
Another entry for the ‘history doesn’t repeat, but it does rhyme’ category. Rampant demand for leveraged loans has outpaced supply in recent years, leaving CLO managers with a more limited pool of loans from which to create their deals. That means the chance of two CLOs holding the same underlying debt increases so a single soured loan could wind up hitting multiple investors.

Convexity Hedging Beast’ Blamed for Lower Bond Yields, August 19
This isn’t strictly a credit-related piece, but I include it as an example of the reflexivity of markets. It’s very possible that the yield curve inversion we were all worrying about this year was the result of technical forces (convexity hedging), or at least exacerbated by it. That sort of begs the question of whether this kind of technical activity can end up worsening, or event creating, trouble in markets. See also, the VIX exchange-traded product blow-up of early 2018 or the occasional rumblings of a similar dynamic in credit derivatives and the cash market.

Repo Fragility Exacerbated by a Hot New Corner of Funding Market
JPMorgan Warns U.S. Money-Market Stress to Get Much Worse
Odd Lots: Why the Repo Market Went Crazy
Repo Oracle Zoltan Pozsar Expects Even More Turmoil
Repo! A blow-up in the repo market happened this year! Again, this is not strictly credit-related, but turmoil in this crucial short-term lending market can end up impacting dealers’ risk appetite and therefore wider markets. Of particular interest is the role of sponsored repo outlined in the first piece. This is something the Bank for International Settlements ended up singling out as a key catalyst for the troubles.