Credit markets look increasingly dangerous

Subscribe to enjoy similar stories. Mention 2007 to a group of professional investors, and watch them bristle. The year was a bad one.

It marked the end of the great moderation—a long period of low inflation and steady economic growth that began in the 1980s—and the start of strains in credit markets which became the global financial crisis. You would not be the only one bringing up the year, though. Gloomier investors now sense pre-crisis complacency in credit markets.

Over the past month, the spread between yields on corporate bonds and Treasuries has fallen to its lowest since 2007. Junk bonds offer spreads of just 2.8 percentage points, far below the 4.5-point average of the past two decades. A handful of the highest-rated corporate bonds, issued by firms like Microsoft, offer yields lower than those issued by the American government.

The market is priced for perfection; investors think the risk of disorder is just about as low as it has ever been. They do so even as high-profile bankruptcies and worries about America’s economy cause strains in corners of the credit markets. On September 10th, Tricolor Holdings, a sub-prime automotive lender, filed for bankruptcy.

It stands accused of fraud by Fifth Third Bank, one of its creditors. Then on September 28th First Brands, a car-parts-maker, followed suit. The company revealed a web of liabilities worth at least $10bn; an internal probe is now investigating whether the firm used receivables—money that was due from customers—to borrow from lenders several times over.