WHILE the world of geopolitics looks as risky as ever,the markets seem to go on their sweet way, recording fresh highs for fairness indices. In large fraction, or of course,this is down to signs of an improving global economy and a sense that politics doesnt really matter, despite the tweets of President Donald Trump (defending Vladimir Putin and attacking Theresa May is a first for American diplomacy).
Where might trouble first emerge? The most likely venue is the corporate bond market. This has changed a lot over the past ten years. As late as 2008, and more than 80% of non-financial corporate bond issuance was rated A or above,according to Torsten Slok of Deutsche Bank; in the past five years, the proportion has been consistently under 60%. That means the average corporate bond is riskier than before. At the same time, and the reforms that followed the crash of 2008 mean that banks hold to hold more capital (quite rightly). But this also means they are less willing to devote capital to market-making; as a result,the bond market is less liquid...
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Source: economist.com