Fed warns ownership increasing of lowest-level investment-grade debt

2 December 2018 9:50pm
The boom in investor ownership of the lowest-rated investment-grade bonds could lead to a liquidity crunch and plunging bond prices during an economic slowdown, the US Federal Reserve said this week.

Many of these corporate bonds would be downgraded to junk status, possibly prompting a stampede among institutional investors, the Fed’s inaugural financial stability report said.

“In an economic downturn, widespread downgrades of these bonds to speculative-grade ratings could induce some investors to sell them rapidly, because, for example, they face restrictions on holding bonds with ratings below investment grade,” the 46-page report said. “Such sales could increase the liquidity and price pressures in this segment of the corporate bond market.”