The credit market is humming— and that has Wall Street on edge

Concerns mount that a frothy market is concealing signs of excess; sudden bankruptcies rattle investors

- Matt Wirz & Sam Goldfarb

The frothy mood has some on Wall Street worried that the market is priced for perfection and ripe for a fall.

(REUTERS)

U.S. credit markets are running hot—maybe too hot.

Investors are gobbling up corporate debt like it is going out of style—even though the rewards, by some measures, are lower than they have been in decades. The frothy mood has some on Wall Street worried that the market is priced for perfection and ripe for a fall.

That is why any bad news is touching a nerve and raising the question of whether something more profound is ailing American borrowers. Two sudden bankruptcies in the auto world—of a subprime lender and a parts supplier—have triggered those conversations among bond investors and analysts.

So far, there is no sign of wider fallout—and each of those situations had unique characteristics that don’t point to broader trends. But combined with other challenges, such as persistent inflation and rising defaults in a hot Wall Street segment known as “private credit,” it is enough to give longtime traders pause.

“There’s been a very positive investment environment for a long time, with a large amount of money and a lot of optimism,” said Howard Marks, co-chairman of investment firm Oaktree Capital Management, which specializes in credit investing. He said that can lead to high pricing and declining quality. “The worst loans are made at the best of times.”

High-yield bond analysts at Barclays compared the current situation—with valuations so high and signs of stress emerging—to being in a Star Wars garbage chute with Princess Leia and Han Solo and “the walls compressing on all sides”.