When the U.S. falls into a recession, a credit bubble will explode - MarketWatch

When the U.S. falls into a recession, a credit bubble will explode - MarketWatch



.... Corporate debt issuance, especially high-yield debt, has exploded since 2009.

2. Tighter regulations discouraged banks from making markets in corporate and high-yield debt.

Both are problems, but the second is worse. Experts tell me that Dodd-Frank requirements have reduced major banks’ market-making abilities by around 90%. For now, bond market liquidity is fine because hedge funds and other non-bank lenders have filled the gap.

The problem is they are not true market makers. Nothing requires them to hold inventory or to buy when you want to sell. That means all the bids can “magically” disappear just when you need them most.

Worse, I don’t have enough exclamation points to describe the disaster when all high-yield funds try to sell at once and at fire-sale prices to meet redemptions. In a bear market, you sell what you can, not what you want to. The picture will not be pretty.