Jittery US credit markets driving tighter financial conditions? | Deloitte Insights
Viewing offline content

Limited functionality available

Dismiss
United States
  • Services

    What's New

    • US business impact of COVID-19

      Restart and recover with confidence

    • Register for Dbriefs webcasts

    • Change isn't just coming. It's here.

      Taking action against systemic bias, racism, and unequal treatment

    • Tax

      • Global Business Tax Services
      • Global Employer Services
      • Multistate Tax
      • Operations Transformation for Tax
    • Consulting

      • Core Business Operations
      • Customer & Marketing
      • Enterprise Technology & Performance
      • Human Capital
      • Strategy & Analytics
    • Audit & Assurance

      • Audit Innovation
      • Accounting Standards
      • Accounting Events & Transactions
    • Deloitte Private Company Services

    • Mergers & Acquisitions

      • Total M&A Solution
      • Post-merger Integration
      • Divestiture & Separation
    • Risk & Financial Advisory

      • Accounting & Internal Controls
      • Cyber & Strategic Risk
      • Regulatory & Legal
      • Transactions and M&A
    • Analytics

    • Cloud

  • Industries

    What's New

    • US business impact of COVID-19

      Restart and recover with confidence

    • Register for Dbriefs webcasts

    • Industry Outlooks

      Key opportunities, trends, and challenges

    • Consumer

      • Automotive
      • Consumer Products
      • Retail, Wholesale & Distribution
      • Transportation, Hospitality & Services
    • Energy, Resources & Industrials

      • Industrial Products & Construction
      • Mining & Metals
      • Oil, Gas & Chemicals
      • Power, Utilities & Renewables
    • Financial Services

      • Banking & Capital Markets
      • Insurance
      • Investment Management
      • Real Estate
    • Government & Public Services

      • Civil Government
      • Defense, Security & Justice
      • Federal Health
      • International Donor Organizations
      • State, Local & Higher Education
      • Transport
    • Life Sciences & Health Care

      • Health Care
      • Life Sciences
    • Technology, Media & Telecommunications

      • Technology
      • Telecommunications, Media & Entertainment
  • Insights

    Deloitte Insights

    What's New

    • Deloitte Insights app

      Go straight to smart with daily updates on your mobile device

    • Deloitte Review, issue 27

      Explore business recovery from COVID-19

    • Weekly economic update

      See what's happening this week and the impact on your business

    • By topic

      • AI & cognitive technologies
      • Analytics
      • Blockchain
      • Digital transformation
      • Diversity & inclusion
      • Economics
      • Human capital
      • Innovation
      • Leadership
      • Private companies
      • Risk management
      • Strategy
    • By sector

      • Automotive
      • Consumer products & retail
      • Financial services
      • Government & public services
      • Health care
      • Industrial products
      • Life sciences
      • Oil, gas & chemicals
      • Power, utilities & renewables
      • Technology
      • Telecom, media & entertainment
      • Transportation & hospitality
    • Spotlight

      • US business impact of COVID-19
      • Deloitte Review
      • Economic weekly update
      • Future of mobility
      • Future of work
      • Industry 4.0
      • Internet of Things
      • US business impact of COVID-19
  • Careers

    What's New

    • Life at Deloitte Podcast

      A podcast by our professionals who share a sneak peek at life inside Deloitte.

    • Life at Deloitte Blog

      Discover Deloitte and learn more about our people and culture.

    • Change isn't just coming. It's here.

      Taking action against systemic bias, racism, and unequal treatment

    • Careers

      • Audit & Assurance
      • Consulting
      • Risk & Financial Advisory
      • Tax
      • Internal Services
      • US Delivery Center
    • Students

      • Undergraduate
      • Advanced Degree
      • Professional Development
      • Recruiting Process
    • Experienced Professionals

      • Recruiting Process
      • Veterans
      • Industries
      • Executives
    • Job Search

      • Entry Level Jobs
      • Experienced Professional Jobs
      • Recruiting Tips
      • Explore Your Fit
      • Labor Condition Applications
    • Life at Deloitte

      • Life at Deloitte Blog
      • Meet Our People
      • Inclusion
      • Corporate Citizenship
      • Leadership Development
      • Empowered Well-Being
      • Deloitte University
    • Alumni Relations

      • Update Your Information
      • Events
      • Career Development Support
      • Marketplace Jobs Dashboard
      • Alumni Resources
  • US-EN Location: United States-English  
  • Contact us
  • US-EN Location: United States-English  
  • Contact us
    • Dashboard
    • Saved items
    • Content feed
    • Subscriptions
    • Profile/Interests
    • Account settings

Welcome back

Still not a member? Join My Deloitte

Are jittery US credit markets leading to tighter financial conditions?

by Dr. Rumki Majumdar, Urval Goradia
  • Save for later
  • Share
    • Share on Facebook
    • Share on Twitter
    • Share on Linkedin
    • Share by email
Deloitte Insights
  • By topic
    By topic
    By topic
    • AI & cognitive technologies
    • Analytics
    • Blockchain
    • Digital transformation
    • Diversity & inclusion
    • Economics
    • Human capital
    • Innovation
    • Leadership
    • Private companies
    • Risk management
    • Strategy
  • By sector
    By sector
    By sector
    • Automotive
    • Consumer products & retail
    • Financial services
    • Government & public services
    • Health care
    • Industrial products
    • Life sciences
    • Oil, gas & chemicals
    • Power, utilities & renewables
    • Technology
    • Telecom, media & entertainment
    • Transportation & hospitality
  • Spotlight
    Spotlight
    Spotlight
    • Combating COVID-19
    • Deloitte Review
    • Economic weekly update
    • Future of mobility
    • Future of work
    • Industry 4.0
    • Internet of Things
    • Smart cities
    • US-EN Location: United States-English  
    • Contact us
      • Dashboard
      • Saved items
      • Content feed
      • Subscriptions
      • Profile/Interests
      • Account settings
    22 January 2016

    Are jittery US credit markets leading to tighter financial conditions? Behind the Numbers, January 2016

    22 January 2016
    • Dr. Rumki Majumdar India
    • Urval Goradia United States
    • Save for later
    • Share
      • Share on Facebook
      • Share on Twitter
      • Share on Linkedin
      • Share by email

    Falling oil prices and a rate hike by the Federal Reserve have impacted the market for high-yield bonds, but could these jitters result in an overall tightening of the US credit markets?

    Explore

    View the Behind the Numbers collection, a monthly series from Deloitte’s economists.

    Following the 2008 financial crisis, the US financial sector underwent significant strengthening. Currently, it is better capitalized and loan quality has sharply improved relative to 2008. Banks’ reserves of liquid assets also grew during this period, increasing the sector’s resilience to a liquidity crisis (figure 1). Overall, we believe a stable financial sector has improved broad credit conditions and reduced funding risks.

    Figure 1

    In the bond markets, corporations took the opportunity of unusually low interest rates to raise funds for diverse reasons, including business investment, merger activity, and share buybacks. Investors seeking higher returns expanded their risk appetite to high-yield debt (issued by below-investment-grade companies). Between 2012 and 2015, over $1.2 trillion worth of high-yield bonds were issued in the United States, accounting for about 22 percent of total corporate bond issuance (figure 2).

    Figure 2

    However, beginning with the steep fall in oil prices since June 2014, US credit markets started showing early signs of caution, particularly with exposure to the energy sector. As the US Federal Reserve gave firmer hints of a possible rate hike by the end of 2015, the prospect of more costly funding and better yields on competing investments added to investors’ worries.

    But what started as pain in the low-quality energy sector’s debt has extended to those of other industries.1  The composite spread on US high-yield bonds, a measure of default risk and often an early signal of credit market stress, rose from a low of 3.35 percent in June 2014 to over 7 percent by the beginning of 2016 (figure 3). The very structure of the way that these assets are held by mutual funds and exchange-traded funds may have been partly responsible for the spillover to other sectors. Investors can generally redeem fund shares much faster than a fund can sell illiquid assets in its portfolio—high-yield bonds in the present case. This liquidity mismatch means that excessive stress has the potential to degrade market liquidity and drive prices below fundamental values through forced sell-offs.2

    Corporate debt default rates are currently low and there do not appear to be any broad concerns over excessive leverage. However, weak commodity prices, uncertain global growth, and the anticipation of a rising rate environment have deteriorated corporate debt markets to a certain degree.

    Figure 3

    One key question is whether these worries and the subsequent risk aversion among investors will remain confined to the market for high-yield bonds. As figure 4 shows, for nearly two decades, banks’ lending standards for commercial and industrial (C&I) loans have moved in tandem with high-yield bond spreads. In an environment where credit market stress is on the rise, it’s unlikely that banks will extend loans to companies with weakening financial health.

    Figure 4

    The US Federal Reserve put an end to all speculation regarding a rate hike when it increased the Fed funds rate by 0.25 percent in its December 2015 meeting. A few credit rating agencies expect an increased likelihood of defaults in the coming years with further tightening of US monetary policy.3 Data suggest that banks have started exercising caution in lending; more banks have been tightening standards in lending to corporates in recent quarters, and fewer are reporting increased willingness to make consumer loans (figure 5).

    The coming months will show whether the rising credit market stress results in a healthy correction in risk assessment after years of easy credit, or whether it is an early sign of a more pronounced tightening of the US credit condition.

    Figure 5

    Credits

    Written by: Dr. Rumki Majumdar, Urval Goradia

    Endnotes
      1. Robin Wigglesworth, “Fund failure exacerbates liquidity fears,” Financial Times, December 30, 2015, http://www.ft.com/intl/cms/s/0/51f6d260-a5cf-11e5-a91e-162b86790c58.html#axzz3wR3x8qLh. View in article
      2. Office of Financial Research, Financial Stability Report, 2015, https://financialresearch.gov/financial-stability-reports/files/OFR_2015-Financial-Stability-Report_12-15-2015.pdf. View in article
      3. Eric Plat, "Interest rate rise: Turning point looms for US debt binge,” Financial Times, September 9, 2015, http://www.ft.com/intl/cms/s/0/25f138ce-5636-11e5-9846-de406ccb37f2.html#axzz3x1Q5t9G4. View in article
    Show moreShow lessShow less

    Topics in this article

    Behind the Numbers , Economics

    Deloitte Consulting

    Learn more
    Download Subscribe

    Related

    img Trending

    Interactive 3 days ago

    Dr. Rumki Majumdar

    Dr. Rumki Majumdar

    Associate director | Deloitte India

    Dr. Rumki Majumdar is an associate director and economist with Deloitte India. She writes on several contemporary economic and sector-specific issues related to India with a focus on policy implications on industries such as consumer, financial services, energy and resources, technology, and public services. She has also written on numerous economic issues about the United States and several emerging economies for Deloitte Insights in the past. She currently heads the Client and Insights research team and regularly advises Deloitte India’s executive leadership on Indian economic outlook.

    • rumajumdar@deloitte.com
    • +91 80 6188 5684
    Urval Goradia

    Urval Goradia

    Urval, Deloitte Services LP, is a senior market insights analyst at the Deloitte Center for Financial Services. Urval researches and writes on a broad range of themes in banking and capital markets, including strategy, risk, and regulation, with a specific focus on performance imperatives. Before joining Deloitte, he was a credit analyst covering financial institutions at the Fitch Group. Goradia is a CFA charter holder.

    • ugoradia@deloitte.com
    • +1 212 436 2085

    Share article highlights

    See something interesting? Simply select text and choose how to share it:

    Email a customized link that shows your highlighted text.
    Copy a customized link that shows your highlighted text.
    Copy your highlighted text.

    Are jittery US credit markets leading to tighter financial conditions? has been saved

    Are jittery US credit markets leading to tighter financial conditions? has been removed

    An Article Titled Are jittery US credit markets leading to tighter financial conditions? already exists in Saved items

    Invalid special characters found 
    Forgot password

    OR

    Social login not available on Microsoft Edge browser at this time.

    Connect Accounts

    Connect your social accounts

    This is the first time you have logged in with a social network.

    You have previously logged in with a different account. To link your accounts, please re-authenticate.

    Log in with an existing social network:

    To connect with your existing account, please enter your password:

    OR

    Log in with an existing site account:

    To connect with your existing account, please enter your password:

    Forgot password

    Subscribe

    to receive more business insights, analysis, and perspectives from Deloitte Insights
    ✓ Link copied to clipboard
    • Contact us
    • Search jobs
    • Submit RFP
    • Subscribe to Deloitte Insights
    Follow Deloitte Insights:
    Global office directory US office locations
    US-EN Location: United States-English  
    About Deloitte
    • About Deloitte
    • My Deloitte
    • Deloitte Insights
    • Press releases
    • Email subscriptions
    • Submit RFP
    • US office locations
    • Alumni
    • Global office directory
    • Newsroom
    • Dbriefs webcasts
    • Contact us
    Services
    • Tax
    • Consulting
    • Audit & Assurance
    • Deloitte Private Company Services
    • Mergers & Acquisitions
    • Risk & Financial Advisory
    • Analytics
    • Cloud
    Industries
    • Consumer
    • Energy, Resources & Industrials
    • Financial Services
    • Government & Public Services
    • Life Sciences & Health Care
    • Technology, Media & Telecommunications
    Careers
    • Careers
    • Students
    • Experienced Professionals
    • Job Search
    • Life at Deloitte
    • Alumni Relations
    • About Deloitte
    • Terms of Use
    • Privacy
    • Privacy Shield
    • Cookies
    • Legal Information for Job Seekers
    • Labor Condition Applications
    • Do Not Sell My Personal Information

    © 2021. See Terms of Use for more information.

    Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the "Deloitte" name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.

    Learn more about Deloitte's work for the US Olympic Committee