Funds' increased holdings of low-rated corporate debt could lead to fire sales, BIS warns

5 March 2019 6:01pm
Mutual funds in the US and Europe have increased holdings of corporate debt with the lowest investment-grade rating to levels that could lead to fire sales if enough bonds are suddenly lowered to junk status, the Bank for International Settlements said.

“If, on the heels of economic weakness, enough issuers were abruptly downgraded from BBB to junk status, mutual funds and, more broadly, other market participants with investment grade mandates could be forced to offload large amounts of bonds quickly,” the quarterly BIS report today said.

The odds of these sales occurring at heavily discounted prices depend on how many companies are downgraded, said the report by the group of the world’s central banks.