A report from Wharton. "Financially engineered collateralized loan obligations (CLOs) consisting of leveraged loans to highly indebted companies are today’s counterpart of the collateralized debt obligations (CDOs) of the last crisis, which contained subprime mortgage loans to highly indebted homeowners. These insights into so-called 'free lunch' strategies and their role in destroying wealth come from Bruce I. Jacobs, co-founder, co-chief investment officer and co-director of research of Jacobs Levy Equity Management."

"Knowledge@Wharton: In your book, Too Smart for Our Own Good, you wrote about some quantitative free-lunch investment strategies that led to the formation of market bubbles that eventually burst, destroying enormous wealth. Do you see any similarities between those crises and the present stock market collapse?"

"Jacobs: Leveraged loans grew dramatically in the low-interest-rate environment of the last few years. By the fall of 2019, the amount of outstanding leveraged loans denominated in U.S. dollars was estimated at $1.2 trillion, roughly equivalent to the outstanding value of subprime mortgages as we entered 2008. More than half of these loans ended up in CLOs."

"K@W: Can quantitative finance modeling help predict future crises? How? Jacobs: JLMSim considers the behavior of investors, security analysts, and traders, and how they affect markets. Security prices are determined by the interactions of these different market participants in the simulated market. One of our findings was that a simulated market with too many momentum investors led to bubbles and crashes. This is what happened during the internet bubble in 1999, when prices bubbled up and subsequently crashed, and this can explain other market bubbles as well."

From Bloomberg. "As U.S. financial markets have rebounded feverishly this past month from the worst of the coronavirus-induced sell-off, one asset has been conspicuously absent from the rally: the collateralized loan obligation. Prices in key parts of the almost $700 billion market -- which through large doses of Wall Street alchemy provides financing to companies with less-than-stellar credit scores -- have remained deeply depressed, typically fetching less than 70 cents on the dollar."

"Credit ratings on risky corporate loans that were stuffed into the CLOs are being downgraded at a pace so frenetic that it threatens to overwhelm safeguards that were put in place to ensure the securities’ financial strength. And if that happens, the firms that manage the CLOs will be forced to dump under-performing debt at fire-sale prices or suspend the cash payments they hand over to their investors."

"'Loan downgrades will keep coming and CLOs will be increasingly constrained,' said Andrew Curtis, head of CLO manager Z Capital Credit Partners. 'CLOs will become more motivated sellers' of lower-rated loans."

The Wall Street Journal. "The normally staid corner of Wall Street where companies and banks borrow money for days or weeks at a time was suddenly at the center of a near financial meltdown last month. Known as commercial paper, this more than $1 trillion market of short-term loans, used by companies to cover expenses such as payroll and paying suppliers, froze during March’s coronavirus-induced mayhem."

"One problem, say market participants: Trading was dominated by a limited cast of big investors who were seeking to sell big slugs of commercial paper through a smaller number of banks that arrange the financing, known as dealers. This led to bottlenecks."

"'Like eight elephants trying to fit through three small doors,' said David Callahan, head of the money-market management team at Lombard Odier Investment Managers."

"The extent of the freeze shocked money-market fund managers. 'Like: Wait a minute, you don’t have a bid on anything?' said Tim Robey, manager of Eaton Vance’s in-house money-market fund, which manages spare cash on behalf of the investment firm’s wider group of mutual funds."

"Although trading has restarted, commercial-paper borrowing rates remain elevated. Investors have sucked out $150 billion, or a fifth of assets from prime funds, since late February. With less money sloshing around, the cost to borrow in commercial paper markets jumped."

From Yahoo Finance. "As the coronavirus pandemic keeps America’s retail stores closed, Michael McGrail is gearing up for what is shaping up to be a busy summer of running going out of business sales at some very prominent chains."

"'Some companies are just not going to survive this,' says McGrail, who is the COO of one of the world’s largest asset disposition and valuation firms, Tiger Capital Group. It will be McGrail’s team — which often includes store associates of a stricken retailer — that hangs the 'Everything must go' signs and works to fetch top dollar on fixtures and other inventory."

"McGrail declines to say which retailers have been calling him up for asset appraisals, except to note the names wouldn’t be any big shock. Such is the current life for McGrail and others in the retail bankruptcy and restructuring fields. In talking to a host of experts, one thing is abundantly clear: A thunderstorm of bankruptcies in retail are about to rain down on Wall Street thanks to the aftershock of the coronavirus."

From Market Watch. "Mortgage rates remained near another record low for the third straight week. If a new low comes, it may not be because the U.S. housing market is struggling. Investors and lenders have grown concerned about borrowers’ ability to repay loans. That has limited interest in mortgage-backed securities, which in turn has limited lenders’ ability to lower rates much further than they already have. And with a growing number of Americans losing their jobs or being furloughed as a result of the coronavirus pandemic, lenders are growing stingier in terms of who they will give a mortgage to."

"As a result, lenders may increase loan pricing in some cases to account for the added risk they’re facing right now. Some banks have also imposed more stringent underwriting standards for new home loans, including higher credit scores and down payment requirements. And borrowers who are looking for loans beyond those that qualify for government backing, such as jumbo mortgages, may face greater difficulty in getting them."

"'Limits to forbearance offerings, not to mention high degrees of uncertainty around the credit worthiness of some borrowers, continue to restrict market activity for non-agency and unconventional loans,' said Matthew Speakman, an economist with Zillow. 'The outlook for the coming months remains very uncertain, so the appearance of a calmer market of late could be a mirage as the likelihood of a sharp move in financial markets is still quite high.'"

"But if mortgage rates do move in the weeks and months ahead, it won’t necessarily be because the housing market is struggling. Recent data has suggested that the housing sector has begun to bear the brunt of the coronavirus pandemic’s impact. Economists have forecast a major decline in home sales, and new-home construction has slowed considerably as a result of stay-at-home orders."