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A recurrent topic in the financial press for much of 2018 has been the rising risks in the emerging market asset class.In effect, high-yield U.S. corporate debt is the emerging market that exists within the U.S. economy (let's call it USEM debt).Notably, U.S. corporate yields have failed to rise in tandem with their EM counterparts.Are financial markets overestimating the risks in EM fixed income (EM yields are "too high")? Or are they underestimating risks in lower-grade U.S. corporates (USEM yields are too low)?New issuance activity has shifted to the CLO market, where the amounts outstanding have soared, hitting new peaks almost daily.In the language of emerging markets, the USEM is attracting large capital inflows.All three sources of default risk are now salient and, lacking credible guarantees, the CLO market (like many others) is vulnerable to runs, because the main players are lightly regulated shadow banking institutions.Compared to mortgage-backed securities (and the housing market in general), the scale of household balance sheets' exposure to the corporate-debt market is a different order of magnitude.
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