Chart of the Week: When High Yield Goes Boom

IMF Blog, June 26, 2018

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Canonical URL: Chart of the Week: When High Yield Goes Boom

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Bibliographic details

Authors: Divya Kirti
Published: June 26, 2018

Overview

Author: Divya Kirti
Date: June 26, 2018
Theme: Credit booms can be "good" or "bad"; booms fueled by excessive investor optimism that allocate credit to riskier firms can lead to slower growth or recessions. The piece links rising shares of high-yield (junk) debt during credit booms to weaker subsequent GDP growth.

Methods and data

Sample: debt issued by governments and non-financial companies in 25 advanced economies.
Boom definition: a period of faster-than-normal growth in credit relative to GDP.
Risk metric: the share of credit growth that consists of high-yield debt (junk bonds).

Key findings

Credit booms marked by a rising share of junk bonds were followed by lower economic growth over the following three to four years.
Quantitative result: When the high yield share of debt rises by one standard deviation, GDP growth over the next three years is lower by 2 percentage points.
Interpretation: Rapid credit growth concentrated in riskier borrowers increases downside risks to growth.

Policy implications and recommendations

Policymakers should monitor not just the pace of credit growth but also the riskiness of credit allocation—specifically the share of high-yield debt.
Potential measures to address problematic booms include:
- higher capital requirements;
- measures to restrain credit growth;
- tightening lending standards more broadly.
Note: The blog emphasizes that more research is needed on this topic.

Source: IMF blog — "Chart of the Week: When High Yield Goes Boom" (Divya Kirti, June 26, 2018).

References