Some analysts say that a debt storm is brewing in the United States, both public and private: problems have begun to appear on the surface as loans pile up and borrowers' confidence falters.
More broadly, Fitch's downgrade of U.S. credit and Moody's downgrading of 10 U.S. banks point to problems with U.S. sovereign credit and debts originating in the banking sector. The sovereign credit problem is mainly due to the political polarization in the United States that hinders the ability of the United States to meet its debt, while the banking debt problem reflects structural pressures from tighter credit conditions and Federal Reserve policy.
But debt markets also have more subtle problems, as the private and public sectors face a very different environment than in the first 10 years after the 2008 crisis, when interest rates were historically low. If low interest rates have spurred a lot of borrowing, rising interest rates may be setting the stage for a crash.
This was amply demonstrated earlier this year when Silicon Valley Bank (SVB) went bankrupt due to poor balance sheet management. As interest rates climbed, its bond portfolio depreciated rapidly, dragging down the bank's balance sheet. SVB, Signature Bank and First Republic Bank all went bankrupt in a short period of time.
However, the impact of that event was relatively manageable, but that did not stop market experts and investment icons from warning about high debt levels in an era of rising interest rates. The likes of hedge fund legend Ray Dalio and top economist Nouriel Roubini have warned that a full-blown debt crisis could be on the horizon.
The following four directions and five charts show the warning signs that are flashing in the U.S. bond market:
1. Private debt levels are rising at an alarming rate
Private debt levels are growing rapidly, setting new records this year. Credit card debt surpassed $1 trillion for the first time ever, according to the Federal Reserve.
Personal unsecured loans also set a new record, reaching an unprecedented $225 billion in 2023, according to TransUnion. According to Janus Henderson, an asset manager, the size of corporate debt has grown 6.2 percent over the past year to $7.8 trillion.
The public debt situation looks worse. Bank of America data shows that the balance of U.S. Treasuries exceeded $32 trillion for the first time this year and could increase by $5 billion a day over the next 10 years.
2. A surge in corporate defaults
As interest rates have risen, companies have begun to "succumb" to the debt burden, with more defaults by U.S. companies since 2023 than in all of last year combined. Moody's Investors Service data shows that 55 U.S. companies defaulted on their debt in the first half of this year, up 53 percent from 36 in 2022.
Bank of America strategists warn that up to $1 trillion could default on corporate debt if the U.S. faces a full-blown recession; However, the bank currently believes a recession in 2023 is unlikely.
3. More and more late payments
More and more individuals and companies are defaulting on loans.
In the commercial real estate sector, the percentage of commercial property owners who are 30 days or more overdue or have defaulted on their mortgages rose to 3 percent in the first quarter of this year, reversing a previous decline, according to the Mortgage Bankers Association.
Meanwhile, the delinquency rate for all personal loans rose to 2.23% in the first quarter of this year, up from 1.7% in the first quarter of 2021, according to the Federal Reserve.
4. Banks want to sell risky debt
Banks are already trying to sell loans with a higher risk of default, even if that means selling those assets at a discount. It was previously reported that Wall Street investment banks such as JPMorgan, Goldman Sachs and Capital One are trying to divest large commercial real estate assets.
As financial conditions tighten, banks are also shrinking debt trading across the board. This is causing trouble for the commercial real estate industry, as approximately $1.5 trillion of commercial real estate (CRE) debt will mature in the coming years and will need to be refinanced.
Real estate valuations have been falling due to rising interest rates, and owners may have trouble refinancing their mortgages. Some veteran investors say a wave of commercial mortgage defaults may be coming, and banks have begun to rein in lending after a string of bank failures earlier this year triggered a brief banking crisis.
Earlier this year, Morgan Stanley noted that the credit crunch had arrived, with bank lending seeing its sharpest decline in history.
Note: Total U.S. commercial bank credit
This article is from CaiLian News