The U.S. economy is showing some vulnerabilities as investors increasingly buy up risky corporate debt and businesses rely on “historically high” borrowing levels, the Federal Reserve said Wednesday in its first-ever financial stability report.
Should the economy turn, money managers who've been chasing returns might be in for a rude awakening, with prices for leveraged loans and junk bonds potentially causing some of the steepest losses, the U.S. central bank warned.
“High leverage has historically been linked to elevated financial distress and retrenchment by businesses in economic downturns,” the Fed said in a section of its report highlighting how indebted companies are borrowing even more money. “Such an increase in financial distress, should it transpire, could trigger a broad adjustment in prices of business debt.”
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