In an exclusive interview with Business Insider, Brad McMillanthe chief investment officer of the $150 billion Commonwealth Financial Networkrevealed an overlooked dynamic he says will worsen any economic downturn.He's specifically worried about the number of US companies whose credit ratings are sitting dangerously close to junk levels, and warns that an economic slowdown could bring conditions to a head.With the market fresh off one of the more difficult and volatile weeks in recent memory, one might assume that all negative scenarios have been covered.After all, when the market is hit in such hard and swift fashion, people are usually quick to point fingers. The process can unearth all sorts of dormant headwinds.Which is why it's so surprising that no one seems to be talking about the precarious and potentially damaging situation that exists in the US credit market.But it's not lost on Brad McMillan, the chief investment officer of the $150 billion Commonwealth Financial Network. He's specifically worried about the effect that higher interest ratesone of the primary culprits of this past week's wreckagewill have on corporate debt.McMillan notes that as lending conditions remained loose for years following the financial crisis, a lot of risky junk-rated debt became largely interchangeable from its investment-grade counterpart."But half of that is just one step above junk," McMillan explained in an interview with Business Insider. "So were only one economic slowdown away from a significant portion of the investment-grade market dropping to high-yield."The chart below shows this dynamic in play. The spread between US investment-grade and high-yield bonds is currently the tightest it's been since early 2011. That means traders are paying the smallest premium in nearly eight years for safer credit.So what does it all mean' Allow McMillan to explain (emphasis ours):"First of all, youre going to have all of those companies having to refinance at higher rates. But thats not the biggest problem, because right now, the premium between high-yield and investment-grade rates is at one of its lowest levels ever.""So youre going to get a double bump as people start to get worried. So all of a sudden youre going to have a large number of companies in quite a bit of trouble with debt. And thats where you start to see pullbackscompanies cutting their spending and laying people off."While McMillan doesn't see this unstable debt situation as an imminent threat to the economy or the market, he does acknowledge that it will make matters even more complicated once the ongoing cycle starts to wind down.According to a running four-part recession checklist he monitors constantly, McMillan anticipates an economic reckoning will strike in late 2019.That means investors still have time to come to their senses and start treating riskier debt in proper fashion. Whether they do that is another story entirelyand their ultimate decision could go a long way toward determining how severe the next recession ends up being.SEE ALSO:A hidden threat that's been haunting the market for years is flaring up ' and it could mean the meltdown in stocks is just getting startedJoin the conversation about this storyNOW WATCH: Here's what caffeine does to your body and brain
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