One other credit market that is also coming under scrutiny is the leveraged-loan market (which involves loans to companies that are heavily indebted). The International Monetary Fund sounded the alarm in November warning about excesses in this $1.3 trillion global market, a market that has ballooned in issuance the last few years.
According to the report, new issuance of leveraged loans hit a record $788 billion in 2017, surpassing the pre-crisis high of $762 billion in 2007. The authors also cite concerns about prevailing underwriting standards and credit quality on such loans.
"New deals also include fewer investor protections, known as covenants, and lower loss-absorption capacity. This year, so-called covenant-lite loans account for up to 80 percent of new loans arranged for non-bank lenders (so-called 'institutional investors'), up from about 30 percent in 2007."
These "covenant-light" loans make investors a lot more exposed in case of a downturn.
This echoes similar warnings from the Federal Reserve over the last few months, the latest coming on Monday as Randal Quarles, the Fed's vice chairman for bank supervision, announced that the central bank is analyzing bank's exposure more closely to collateralized loan obligations (structures that package and securitize leverage loans and sell them on to institutional clients such as hedge funds and pension funds). The report also warned about weaker underwriting standards.
Not all credit investors share this negativity however, and point to the still positive growth environment and low prevailing default rates. That would change if the next recession were to hit sooner rather than later.
"Even after accounting for recent spread widening, we believe high yield spreads are still relatively tight in the U.S. and in Europe, Jason Dillow, CEO & CIO of Bardin Hill Investors told CNBC last week.
"We are finding attractive opportunities in smaller and medium sized capital structures, which are overlooked by larger asset managers. Complex situations involving numerous holding companies and intercompany claims create opportunity, particularly when you can get active," Dillow added.