July 24, 2023
The Federal Reserve’s tightening is beginning to squeeze businesses as more than twice as many corporations filed bankruptcy this year than at the same point in 2022. Chapter 11 bankruptcy filings are up significantly – to the highest rate since 2010. More than 230 U.S. companies have filed for bankruptcy this year through April.
What’s causing all this? The prime triggers include a slowing economy, high interest rates, and persistent inflation.
Consumer discretionary companies have suffered most, according to S&P Global. Retailers and restaurants have struggled with different economic conditions and the Fed hasn’t made things any easier on them with its interest rate hikes.
Banks, health companies, and industrial producers have been hit hard too. Plus, corporate debt default rates could climb to 8%, meaning losses of nearly $1 trillion.
Last month the Fed said it would pause its rate-hiking activities. But that might not help much because these corporate failures spring from lower rate loans resetting to higher interest rates. That won’t end until rates drop significantly, which would probably mean a recession.
The Fed is committed to fighting inflation, but it seems to forget the surrounding consequences and collateral damage. For now, if you own high yield bonds or corporate bonds, you better keep an eye on your bond portfolio.