Many investors are relieved that the stock market is nearing a one-year high. However, debt markets are creaking as a result of rising interest rates.
Credit conditions for businesses, consumers, and real estate developers tightened this spring to levels not seen since the height of the Covid epidemic, according to a Wall Street Journal examination of public and private credit data.
This winter, the flow of cash on Wall Street was already slowing, but recent instability in regional banks exacerbated the situation. The wrangling over the debt ceiling has increased the prospect of a government default, which, if it occurs, will send global financial markets into a tailspin.
The slowdown is a result of the Federal Reserve’s interest-rate hike effort to combat inflation, and it means that there is less money available for US businesses and consumers to hire new personnel, build plants, and pay bills.
To be fair, many have been expecting a recession for months, but it hasn’t materialized. Jobs figures, which economists usually use to evaluate economic health, are exploding.
However, there are caution indications in the generally more conservative debt market, which moves money from banks and other lenders to firms and people. A loan constraint that affected commercial real estate this spring could be a leading indicator for the whole economy.
What to look out for
Over the last 30 years, recessions have closely mirrored banks’ willingness to lend out the cash they get from depositors. According to the Fed’s senior loan officer opinion poll, bankers are charging higher interest rates on loans to consumers, corporations, and commercial real estate. They are also requiring that borrowers provide additional collateral.
Investors that are willing to take a chance are profiting.
Joel Holsinger, co-head of alternative credit at Ares Management, a $360 billion fund manager, specializes in financing companies that can’t easily borrow from banks or bond investors. He claims that the gap has developed into a canyon in recent months.
Bond markets, the other major source of borrowing for US borrowers, have likewise become significantly more expensive for borrowers as investors take less risk. New corporate bond sales have decreased. Sales of mortgage-backed bonds and bonds backed by consumer loans have also declined.
Companies that require borrowed funds to expand or merely stay alive are running out of options. According to S&P Global Market Intelligence, corporate bankruptcy filings have reached their highest level since 2010.
Commercial real estate has been hit the hardest by financial turmoil.
Landlords are dealing with rising interest costs. They are also receiving less cash from tenants who do not require as much office space as they once did because more employees work from home.
The demise of Signature Bank resulted in a significant decline in lending in New York’s generally strong real-estate market. The signature was a major real-estate lender in the area, and the fallout from its March collapse may foreshadow contractions elsewhere as banks throughout the country cut back.
According to Maverick Real Estate Partners, new commercial mortgage issuance in New York City fell substantially in the first four months of the year compared to the same period in 2022.
Bond investors are likewise pulling back and demanding higher interest rates when they do lend. Commercial mortgage-backed bonds with triple-A credit ratings, which are higher than the US government’s, pay approximately 2% more than comparable US Treasury bonds.
The credit crunch is affecting American households. Fintech lenders, mortgage brokers, and other nonbank lenders are reducing loans since they can’t borrow as much and expect increased delinquencies.
Simultaneously, many Americans are depleting their savings from the recession, when the government distributed stimulus checks and there were fewer places to spend money. increased credit card and auto loan interest rates have harmed many families, and increased mortgage rates have prevented some from purchasing a home.
More people are falling behind on their loan payments.
