CHAPTER 5

Testing the Limits of Credit Markets

The Complacent and Desperate Search for Yield

Faced with low or negative interest rates and yields in “risk-free” government bonds, savers and investors have been incentivized—or rather, forced—to take more duration risk to generate the fixed income required to meet their liabilities. A self-enforced process of lending for longer and longer maturities in exchange of lower and lower yields that in my view is leading to the largest duration bubble in history.

The exact same dynamics are incentivizing—or rather forcing—investors and savers to take more credit risk, lending to weaker and weaker credits for lower and lower yields, inflating a bubble in the credit and equity markets.

The Credit Spread ...

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