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Illustration: Aïda Amer/Axios

The Fed might not be raising rates, but it is again warning about Corporate America's reliance on leveraged loans.

Why it matters: An economic slowdown could create a sharp spike in defaults, affecting not just individual companies but also mutual funds that hold bank debt or leveraged loans themselves.

Per the central bank's latest Financial Stability Report:

  • Leveraged loans now stand at $1.15 trillion.
  • That's represents a 20.1% increase during 2018, compared to an average growth rate of 15.8% between 1997 and 2018.
  • The current total is larger than prior peaks in 2007 and 2014.

The big picture: It's not just the aggregate numbers that worry central bankers. It's also the continued weakening of leveraged lending standards and covenants. For example, the share of large loans with debt-to-EBITDA ratios above 6x is now higher than during prior peaks in 2007 and 2014. Moreover, a Moody's index tracking the strength of leveraged loan covenants is at its lowest level since the index launched in 2012 — including a substantial rise in cov-lite loans.

  • The Fed acknowledges that leveraged loan credit performance has remained "solid" with low default rates,"in part reflecting the relatively strong economy." It also believes today's leveraged loan bundles are better structured than pre-crisis residential mortgage bundles.

The bottom line: That's a major contrast from 2008, in that the Fed in 2019 suggests these loans could create a severe bubble deflation rather than an all-out pop. But perhaps the biggest difference is that the Fed and others are actually sounding preemptive alarms. If things get messy this time, no one will be able to pretend they weren't warned.

Go deeper: The debt market is littered with risky loans

Go deeper

Dion Rabouin, author of Markets
Updated 2 hours ago - Economy & Business

Our make-believe economy is here to stay

Illustration: Eniola Odetunde/Axios

The Federal Reserve and global central banks are remaking the world's economy in an effort to save it, but have created something of a monster.

Why it matters: The Fed-driven economy relies on the creation of trillions of dollars — literally out of thin air — that are used to purchase bonds and push money into a pandemic-ravaged economy that has long been dependent on free cash and is only growing more addicted.

Mike Allen, author of AM
3 hours ago - Politics & Policy

Why Trump may still fire Barr

Photo: Jabin Botsford/The Washington Post via Getty Images

Attorney General Barr may be fired or resign, as President Trump seethes about Barr's statement this week that no widespread voter fraud has been found.

Behind the scenes: A source familiar with the president's thinking tells Axios that Trump remains frustrated with what he sees as the lack of a vigorous investigation into his election conspiracy theories.

Mike Allen, author of AM
3 hours ago - World

Scoop: Trump's spy chief plans dire China warning

Xi Jinping reviews troops during a military parade in Beijing last year. Photo: Thomas Peter/Reuters

Director of National Intelligence John Ratcliffe on Thursday will publicly warn that China's threat to the U.S. is a defining issue of our time, a senior administration official tells Axios.

Why it matters: It's exceedingly rare for the head of the U.S. intelligence community to make public accusations about a rival power.