A U.S. financial watchdog warned that distress in the junk-bond market could spread to other parts of the financial system, a finding likely to raise eyebrows during a period of market volatility, the Wall Street Journal reported today. The U.S. Office of Financial Research in a report yesterday found that “elevated and rising credit risks” among nonfinancial businesses and emerging-market borrowers, and it said that a significant shock that further impairs credit quality “could potentially threaten U.S. financial stability.” The agency’s first-annual financial stability report pointed to a long period of increased borrowing by U.S. companies, in many cases at borrower-friendly terms that include fewer protections for lenders if borrowers get in trouble. Also, 2015 is set to be a record year for corporate debt issuance, and the ratio of that debt to gross domestic product is at its highest level since the financial crisis, the OFR report said.
