Credit market faces $1 trillion problem from borrowers looking to refinance their debts

With $1.05 trillion to $1.2 trillion worth of low quality speculative grade debt, the lower quality, high yield, and leveraged loan borrowers may no longer be able to refinance their debts.

The Business Insider reported that companies borrowed a lot after the financial crisis since there were extended periods and interest rates were low during that time. Higher-risk companies have benefited the most from this condition.

Investors who are after big yields paid for riskier bonds, which made them raise capitals at record low costs. However, as the companies look to refinance their debts, interest rates have already started to rise, which will pose a bigger problem.

The report from the Business Insider pointed out that it seems the Fed doesn't see the magnitude of the problem the corporate credit markets is currently facing.

The Financial Times wrote that more than $1 trillion US corporate debt was downgraded this year. The credit cycle is also close to its final innings as defaults climb to record high levels. Expert analysts projects default rates to rise in the next 12 months, which is a bad time for the fed policy makers as they plan to tighten monetary policy in the next few weeks.

According to Bloomberg News the credit market is pricing a grim assessment of the U.S. economy. However, Goldman Sachs Group Inc said that buyers can earn a lot from this mistake. Goldman Sachs credit strategist Lotfi Karoui said Tuesday that the increasing risk premiums for corporate debt in the U.S. is creating "false recession signal."

"We expect the macro environment to be broadly supportive for credit," said Karoui. "Credit markets are likely to be no better at predicting recession than any other asset market."

Meanwhile, the $1.05 trillion to $1.2 trillion low quality speculative grade debt facing the credit market, according to the Swiss global financial services firm UBS, is a lot since the Federal Reserve is not supporting credit markets anymore.