[trader worried concerned] * ACCORDING TO STRATEGISTS AT BANK OF AMERICA MERRILL LYNCH, TWO $3 TRILLION RISKS HANG OVER MARKETS RIGHT NOW — ITALIAN SOVEREIGN DEBT AND US CORPORATE DEBT. * BOTH HAVE BEEN ASSIGNED CREDIT RATINGS OF BBB OR EQUIVALENT, THE LOWEST TIER OF INVESTMENT GRADE, AND A NOTCH ABOVE JUNK. * BAML BREAKS DOWN WHY ONE RISK IS FAR MORE ACUTE THAN THE OTHER. There are two huge risks facing investors right now, each with about $3 trillion at stake. But one is a whole lot more troubling than the other, according to research released this week by strategists at Bank of America Merrill Lynch. The first is the US corporate debt market, and the second is the sovereign debt market in Italy, said the team of BAML strategists led by Hans Mikkelsen, the firm's head of high-grade credit strategy. While both have been assigned credit ratings of BBB or equivalent — the lowest tier of investment grade, and one notch above junk — BAML says the risks associated with the Italian situation are far more acute. "We are much more comfortable with the $3 trillon BBB-rated US corporate bond market than the near-$3 trillion BBB rated Italian sovereign," Mikkelsen wrote in a recent client note. Fears about Italian debt have flared up as a consequence of the country's ongoing budget dispute with the European Union. On Tuesday, the EU took the unprecedented step of rejecting the budget after Italy proposed increasing its budget deficit to levels far above those previously agreed upon. The budget proposed by Italy would increase both the nation's overall government debt and its deficit in the short run, pushing the deficit as high as 2.4% of gross domestic product over the coming years. This means Italy would fall foul of a previously mandated maximum deficit level of 0.8% of GDP. Fears over the budget led Italian sovereign debt to be downgraded by Moody's late last week. Moody's affirmed a stable outlook, meaning it is unlikely to downgrade further. But if circumstances change, it could have a major impact on financial markets. BAML went as far as to suggest that further downgrades could lead to a situation similar to that of Greece during its debt crisis in 2010 and 2011. "As we saw with Greece at the height of the European sovereign crisis, the key risk associated with sovereign ratings downgrades into high yield is bank deposit flight, a scenario that no doubt again would be highly disorderly and contagious to US credit via the global financial system," said Mikkelsen. He continued: "The ability and willingness of the ECB to intervene this time would be much more limited, absent commitment to fiscal austerity." BAML's note was published prior to the EU's formal rejection of the Italian budget, an event that is likely to have exacerbated these concerns. SEE ALSO: THE 34 BEST CEOS IN THE WORLD, ACCORDING TO THE HARVARD BUSINESS REVIEW Join the conversation about this story » NOW WATCH: Here's what caffeine does to your body and brain
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