New crisis coming? Credit market shows alarming similarities with 2008

Tensions are rising rapidly in the global credit market. According to Bloomberg, the current situation is very similar to the period just before the 2008 financial crisis.

The interest rate on risky corporate bonds has now fallen to the lowest point in almost twenty years. Asset managers are striking en masse, while experts warn of dangerous overconfidence.

Credit interest rates at their lowest point since 2007

Companies pay an average of only 1.03 percent interest on their business loans. According to analysts, this is exceptionally low, especially given the increasing geopolitical tensions and economic uncertainty. This interest rate is comparable to the level of mid-2007, just before the credit crisis broke out.

However, investors hardly seem concerned. They are desperate for returns in a market with low interest rates. But that search increasingly forces them towards riskier debt instruments. At the same time, global risks are piling up: from fragile government policies in the US to unexpected bankruptcies and geopolitical conflicts.

Wall Street felt the pain before

Bloomberg points to a recent incident reminiscent of 2008. In October, two American car companies unexpectedly went bankrupt. They had borrowed heavily despite questionable creditworthiness. The blow hit not only small banks, but also large Wall Street institutions that had resold their loans.

Investors punished the banks on the stock market. Although the sector has since recovered, the underlying unrest remains palpable.

‘Pride is the most dangerous’

“Pride should be the scariest word in the risk markets right now,” warns Luke Hickmore of Aberdeen Investments. He advises to remain cautious with risky investments.

Still, analysts point to a possible cut in US policy rates, which could further fuel demand for corporate loans. The temptation is great: lower interest rates mean more attractive deals, despite increasing risk.

‘Toxic cocktail’ of debt and interest

Market dynamics are creating what experts call a “toxic cocktail.” Higher consumer expenditure, more debt and low interest rates reinforce each other. Investors are increasingly buying high-yield, risky bonds. Ironically, the interest rates on these “junk bonds” are now also historically low.

According to Pimco experts Tiffany Wilding and Andrew Balls, this is a dangerous development. The asset manager adjusts its strategy and invests more selectively, in anticipation of deteriorating economic fundamentals.

US is already facing a debt crisis

The US has been struggling with rising debt levels for some time. For example, in 2022, more than half of American households had credit card debt, with an average of more than $6,000. The interest on such debts is around twenty percent.

President Joe Biden proposed capping interest rates on credit cards at ten percent. That proposal immediately caused share prices to fall at major banks, a sign of how vulnerable the system has become.