Wall Street’s New Risk Machine
Investors are searching high and low for better returns, and that’s led them into markets beyond familiar stocks and bonds.
Yield has been hard to find. The Federal Reserve’s benchmark interest rate was near zero for years after the financial crisis, and even now, with rates rising, the payouts on safe assets such as Treasuries are historically low. Investors looking for serious returns—the kind that fund retirements or maintain college endowments—have been willing to take more chances. And they’ve increasingly turned to debt and alternative assets.
Consider leveraged loans, a $1.3 trillion market that’s eclipsed junk bonds as the most popular way to lend to risky companies. Private equity firms often use them to fund buyouts; their investors range from insurance companies to mutual funds to exchange-traded funds. One draw: The rates they pay go up with prevailing interest rates. But in the past two months, several current and former Fed officials, including former Chair Janet Yellen, have raised concerns about risk building up in leveraged loans as more money pours in.