US corporate defaults to rise on higher-for-longer funding costs, says Deutsche Bank
LONDON (Reuters) -The rate at which riskier U.S. companies default will increase next year, Deutsche Bank said in a Monday note, as a result either of weakening economic growth or the pressure of higher interest payments.
BY THE NUMBERS
The investment bank sees default rates for U.S. speculative grade companies - also known as high yield or junk - rising from their current 4.7% to 4.8% by the second half of 2026.
CONTEXT
Part of the reason is tight monetary conditions. Because the Federal Reserve is not cutting rates, Deutsche says the U.S. 10-year yield will soon rise above U.S. nominal GDP growth for the first time since at least 2011, excluding the pandemic period.
Growth is slowing, and Deutsche sees a 30% chance of a recession, while the U.S. 10-year yield is currently around 4.5%.
It is expected to remain elevated, given the Fed’s concern about inflation, which makes it cautious about cutting interest rates.
In addition, bank lending standards are still tightening.
KEY QUOTE
"The Fed is unlikely to provide rate cuts before job cuts. Either weaker growth and/or higher rates should prevent ... U.S. defaults from falling in 2026."
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