1. Darkening credit outlook: The Federal Reserve spiked the punch bowl a decade ago. Now the party may be over.
Record-low interest rates ushered in a period of easy money that nursed the economy back to health.
But the recovery from the Great Recession is nine years old. With unemployment low and inflation heating up, the Fed is gradually raising rates.
Lending conditions are still lenient, but that may soon change.
Credit conditions are forecast to deteriorate over the coming months, with defaults and borrowing costs rising, according to a survey released last week by the International Association of Credit Portfolio Managers.
“People are getting ready for the downturn,” said Som-lok Leung, the assocation’s executive director. “It doesn’t mean it’s going to come immediately. But cycles still exist, and eventually it will turn.”
When it’s very easy to borrow money, interest rates on loans are closer to the rates on risk-free US Treasuries. That gap, known as the credit spread, widens when nervous investors are less willing to take on risk.
In the IACPM survey, the percentage of investors expecting credit spreads to widen over the next three months was the highest since the second quarter of 2008 — just before the worst of the financial crisis.
No, investors aren’t predicting a return of those scary times. But the results do signal a view that borrowing costs have nowhere to go but up.