BlueMountain Capital Management’s James E. Staley said banks removing risk from their balance sheets has caused a “virtual explosion” in the U.S. corporate debt markets.
The amount of company debt issued has doubled since 2008, Staley said in a Bloomberg Television interview Tuesday at the Milken Institute Global Conference in Beverly Hills, California. The expansion, helped by record low borrowing costs, is also being driven by mutual funds, which account for about 80 percent of growth in debt markets, he said.
“Retail investors and institutional investors looking for that yield have put money into mutual funds, and mutual funds have put that money to work supporting the corporate debt market,” said Staley, who worked at JPMorgan Chase & Co. before joining BlueMountain as a managing partner in January 2013. He had once been seen as a potential successor to the bank’s chief executive officer, Jamie Dimon.
Liquidity and transparency in the corporate debt market have decreased after regulation forced banks to give up such holdings, and synthetic credit usage has declined, Staley said.
To improve those factors, credit markets should more closely resemble equities, he said. Increasing the use of credit derivatives, which came under fire during the 2008 financial crisis, can also help standardize debt issuance, Staley said.
“Synthetic credit is sort of like a prescription drug,” he said. “If they’re misused, they’re not good, but if they’re used properly they can provide a lot to the system.”
A 2013 report by McKinsey & Co. and Greenwich Associates concluded that the corporate bond market is unlikely to ever resemble cash equities.
Assets at New York-based BlueMountain have jumped about fourfold to $20 billion since June 2009.