Negative yields prompt institutional investors to buy up risky loans

With central-bank buying sprees hammering bond returns, some of the most conservative fixed-income investors are throwing caution to the wind.

Institutional players like insurers and pension funds in Europe have almost completely elbowed out banks as lenders in leveraged buyouts and to junk-rated companies, according to Sept. 18 research from Societe Generale.

A decade ago, the opposite was true: banks were the biggest buyers of loans to fund leveraged buyouts and other companies carrying heavy debt burdens. But in the aftermath of the financial crisis traditional lenders retreated as regulators cracked down on risky activities blamed for sparking economic meltdown.

Spurred by a desperate search for returns, investors are piling in. They're seeking alternatives to $14.5 trillion of negative-yielding bonds — a sizeable chunk of which sit in Europe where policymakers embarked on new quantitative easing just last week.

Even as bond markets signal a recession that will sap companies' debt-servicing abilities and trigger defaults, they're accepting fewer safeguards to lend.

So-called covenant-light loans, which curtail protections for lenders, account for 93% of sales this year. That compares with 88% over the same period last year, a trend that flies in the face of "investor pushback against loose docs," according to Societe Generale.

Bruce Richards, the chairman and CEO of Marathon Asset Management, called negative yields "the most absurd thing he's seen" at a conference in New York yesterday, reiterating earlier warnings that central banks across the globe are fanning dangerous risk-taking.

"It's doing nothing to stimulate aggregate demand — much of Europe is mired in what is a very slow economic environment," he told Bloomberg TV on Sept. 12 after the European Central Bank renewed its bond-buying program. "All this does is create more of a debt bubble."