When the Federal Reserve examines the trading books of the world's largest banks, regulators may find surprisingly little exposure to one risky market: junk bonds.
Wall Street's biggest debt dealers have been dumping speculative-grade securities at the fastest pace on record ahead of annual stress tests by the Fed. They reduced their holdings by 68 percent in the week ended Oct. 15, as the market posted losses of 1.5 percent that week alone, according to data released by the Fed last week.
It makes sense for banks to scale back risk tied to speculative-grade credit since regulators are going to focus on the debt in testing "for significant spread widening, particularly of less-liquid securities," said Charles Peabody, a banking analyst at research firm Portales Partners LLC in New York. "The odds are you're going to see the downside of the credit cycle in the next year or so."
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