Global investors’ appetite for risk is falling sharply, says BOE

BLOOMBERG 

The Bank of England (BOE) warned the next blow up in financial markets may be triggered by corporate credit after a massive build-up in private debt over the past decade.
Riskier corporate borrowing — including high yield bonds, leveraged loans and private credit — is “particularly vulnerable” to interest rate rises and “heightened geopolitical risks increase the likelihood of financial vulnerabilities crystallising,” the BOE’s Financial Policy
Committee said in a report.
The findings are the BOE’s first official assessment of UK financial conditions since the collapse of Silicon Valley Bank and Credit Suisse Group AG earlier this month. Financial markets are wobbling due to rapid rate rises globally over the past 15 months, as central banks tackle soaring inflation, which have
exposed weaknesses.
Last autumn, an asset fire sale by Liability Driven Investment strategies caused by higher yields was only prevented from turning into a death spiral by a $24.7 billion BOE intervention.
To prevent a repeat of the crisis, the BOE unveiled new rules requiring LDI funds to withstand a yield shock of 250 basis points. Last autumn, they were brought down by a 160 basis point move in a matter of days.
While the BOE stressed that the core UK banking system was well-capitalised and had strong liquidity, it warned that risks in non-bank finance — the hedge funds and private credit markets known as “shadow banking” — are rising and “could pose risks to UK financial stability.”
Global high-yield bond, leveraged loan and private credit markets have almost doubled in size over the past decade, with private credit tripling over the period. The stock of US leveraged lending alone totalled $3.5 trillion at the end of 2022, the BOE said.
Revaluations could hit non-banks such as global open-ended funds, pension funds, insurers and hedge funds which might be forced into fire sales that “amplify losses across the system.” Risks could then spill back to UK commercial banks, which have “large exposures to leveraged loans.”