Sunday, August 23, 2015

RISK | Here Be Dragons: The Hunt for Yield

Higher financial risk is associated with higher expected return.
But our highest, least-risky returns may be closer to home -
save energy costs by adding insulation, using passive solar etc.
Two stories today in the NY Times show how in the zero-interest-rate environment the quest for higher returns creates a potentially disastrous reliance on leverage.

Last week's continued stock market correction add up to an ebbing tide that is uncovering some of the risk.

By GRETCHEN MORGENSON
Leveraged loans, a kind of obligation held by floating-rate income funds, carry risks that are often not fully disclosed to investors.

By PETER EAVIS
Bank of Internet USA, which has extended big loans to high-earning people other lenders might shun, has been making profits, and setting off alarm bells.

I posted something on the risks of leveraged loans on November 5 last year.